As the markets moved into September there was a lot of fear.  As measured by GDP, purchasing managers, and the Institute for Supply Management (ISM), the economy appeared to be slowing.  Bond yields were falling as investors believed that the trade war with China was pushing us toward a global recession, as there was talk that ultimately the U.S. would follow Europe and Japan into negative interest rate territory.  Beyond that, the collapse of the new issue market (following the failed IPO of We Work and the languishing stock prices of recent IPOs such as Uber, Slack, and Cloudflare) and the sharp sell-off of the formerly hot cannabis stocks made it feel like the speculative energy of this bull market advance had been spent.  There just didn’t seem to be the excess cash or the confidence to drive stocks to new highs.

There was just one problem with the “this is it” scenario – as a whole, investors weren’t positioned right.  They were too defensive.  They had been, in aggregate, selling stocks to buy bonds for more than a year.  Stocks just don’t make a major high when investor portfolios are chock full of utility, real estate, and consumer staples stocks.  Meaningful market highs happen when the economy is doing well, economically sensitive stocks are in the lead, and investors get ahead of themselves trying to maximize returns.

September became significant, therefore, for what didn’t happen.  The rest of the technology sector was not pulled down by the collapsing IPOs.  In fact, semiconductor indices moved up to new highs.  The trade war did not drag the economy down; September economic data did not show a discernable economy-wide effect.  Lay-offs related to plant closures remained isolated events.  Rhetoric between the U.S. and China was decidedly less confrontational.

Investors began to take notice.  After the September employment report was released on October 4th showing decent hiring strength, stock prices began moving up steadily and bond prices began falling. That type of asset rotation generally indicates a higher risk appetite from investors and implies higher equity prices are expected.  Perhaps even more surprising, international stocks began to rally.  Foreign markets are, as a whole, more sensitive to a global trade war.  Both the U.S. and China can generate sufficient growth internally while most other countries are more dependent on exports.  As tensions cooled, cross border orders picked up.  Emerging markets are doing well because their economies are generally stronger than foreign developed markets (like Germany or Australia).  The former have the latitude to cut interest rates while the latter do not – there rates are already near or below zero.

I believe that before the bull market takes a significant fall (keeping in mind that stocks can decline 5%-10% anytime for any/no reason), speculative activity has to pick up considerably.  The excesses related to IPOs and cannabis stocks just weren’t enough; the average investor did not have much exposure there so they did not lose enough to affect their spending and investing decisions.

The Bond Market

The story in the bond market in 2019 has been falling interest rates.  Most notably, falling long term interest rates, such that the 2-10 year Treasury spread actually inverted in late August.  Two Federal Reserve rate cuts later, that story has been completely reversed.  The 2-10 spread was 21 basis points on New Year’s Day 2019.  As mentioned, it fell to -4 basis points on August 27th.  As of the market close on 11/7/19 it was 24 basis points.  The bond market is screaming that the late October rate cut was a big mistake.  The stimulus provided by the cut has led to losses in longer-term bonds yet it has not weakened the dollar as many had hoped.  Ultimately, the sharp underperformance of high quality, long duration assets will drive investors to shorter maturities and lower quality credits, which is almost always one of the pre-conditions to a more significant market top.  When everybody has “ballast”, market declines tend to be minimal.

MOAT

One of the strongest diversified ETFs recently and year-to-date has been MOAT, the Van Eck Vectors Wide Moat ETF, which follows Morningstar’s patented Wide Moat Focus Index.  One of the things I like about it, besides performance, is that it has very little overlap with the major large cap indices in terms of top holdings.

Disclosure

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.

The S&P 500 is up close to 4% since the last Update and about 6.5% since the June 3rd low.<1>  And yet, nothing really seems different in terms of the economy or the trade outlook.  We still have no resolution to the trade war with China, but much has been made of the fact that Trump might meet with Xi Jinping at which they might make a deal, which then might withstand public scrutiny when revealed, which then might actually be put into effect, which then might actually be adhered to by both sides.  Sorry for the snarkiness, but I believe we are a long way from a meaningful trade resolution.  What actually drove stock prices higher was the collapse of the growth narrative and the subsequent embrace of the multiple rate cuts narrative.  U.S. economic growth of 3% plus was a two-quarter anomaly caused by lower corporate taxes and the buildup of inventory ahead of the potential tariff hikes.  As the investment community adjusted to this and reduced GDP forecasts to 1.3%-2.3% growth for the next few quarters, interest rates collapsed.  Multiple Fed rate cuts have now been priced into stocks.  As you know, lower interest rates equate to lower discount rates which pushes the present value of stocks higher.   We expect the current rally in stocks to last only insofar as the confidence in future rate cuts lasts.

We lightened up on stocks in May as they approached and subsequently broke through some technical support levels. Depending on risk tolerance, some of the proceeds went to cash, but some also went to bonds and gold.  We did not increase stock positions during June as stocks rose.  Both bonds and gold have had nice runs this month, though both might be overbought in the short run.  As long as investors believe interest rate cuts are a when (as opposed to an if), it’s going to be hard not to make money in bonds.  Gold benefits from the low and falling cost of carry<2> since it has no yield.

The IPO wave that we wrote about last month is still in our minds in terms of a late-in-the-cycle marker.  This bull market has flourished on very mild enthusiasm so far.  Bull markets tend to die when everybody gets euphoric. The economy is modestly weakening; that and low inflation keeps the wind firmly at the back of higher quality, dividend paying bonds and stocks. That is our emphasis today.

I have a chart in my office that shows investment metrics for the 20th century.  Because of the Great Depression, there was a period of over twenty years (ending in 1954) that U.S. stocks yielded more than U.S. government bonds.  In other words, companies had to offer investors high dividends to get them to buy their shares because stocks were looked at as being so much more risky than bonds.  The return over the 50 years from 1950 to 2000 for stocks compared to bonds is comically lopsided in favor of stocks<3>.  I think about that today as I look at Europe, where government bonds yield essentially nothing (or in some cases less!) while the average stock dividend is over 3%.  At some point (don’t ask me when) I believe European investors will embrace stocks, if not for the growth prospects then for the simple fact of much more generous yields.  I think of Europe post-financial crisis as being in a Depression of sorts.  Maybe it takes them twenty years to rediscover equities like it took us last century.  I believe that buying European stocks now might just be like buying U.S. equities in say, 1948.

Investment Observations

1. I am not necessarily recommending investing in India. I would just note that it is one of the most un-correlated investment markets you will find anywhere.  Seriously, price movements are as random as managed futures funds, no matter how good or bad the day is for the rest of the world.  IFN is the ETF, and WAINX  are Indian funds I keep an eye on.

2. Not all FAANG stocks are crushing it. Alphabet (Google) is down -7.7% quarter to date (as of 6/25/19 market close).

3. Vanguard Wellesley is a conservative stock funds is worth noting.  Strong relative performance, low expense ratio (0.23%) and low monthly Value-at-Risk (4.49%).

4. If one is contemplating high yield bonds versus floating rate debt today, pick the former. Yield spreads have improved due to strength in government bonds, while capacity to refinance existing debt is modestly better.

5. Doubleline is best known as a bond manager, but it’s Shiller Enhanced CAPE fund (DSEEX) is a large cap value/blend fund that has handily beaten the S&P 500 since inception (2013) at a similar risk and a 55 basis point expense ratio.

6. Gold mining mutual funds are up over 16% this month on average. Bullion ETFs are up 8.8% as of June 25th market close.

   <1> Through June 25th

   <2> In other words, the cost to finance ownership.  When interest rates are very low, it is financially much easier to borrow to acquire a non-cash, non-interest bearing, flowing asset.

   <3>  Despite an incredible run in bonds from 1982 to 1998 as inflation expectations gradually receded, stocks rose more than five hundredfold over those fifty years versus under fifteenfold for bonds (my calculations based on Ibbotson annual return data).

    

Disclosure

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.