10-15 Associates

Three Thousand Six Hundred and Forty-Three

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For those of you that like statistics, 3,643 is the number of days this current bull market has been alive. With the 10- year anniversary on March 9th this year, I thought now would be a good time to gain some perspective on recent months in the markets. The S&P 500 closed at 676 on March 9, 2009 and has advanced over 300% since that date. Although we have endured 6 corrections (a decline of 10% or more), the most recent in December of last year, as of the close of this month the S&P 500 is only about 5% from an all-time high. Just two months ago we were talking about the worst December in decades and today we are celebrating one of the best two opening months to a year in decades. With a blistering start to the year, investors are certainly beginning to ask, “what now?”

As December reminded us, markets typically overreact. By Christmas Eve last year, it was beginning to be apparent that the market had overreacted to some of the near-term noise of the Federal Reserve, the government shutdown, and the stalled talks with China. It would be fair to begin to ask the same question today. The Federal Reserve has moved to the sidelines, government workers are back on the job, and although we have no deal, there has been encouraging news from the China and US trade talks. Has the market overreacted? The S&P 500 has advanced 11.08%, the Dow has climbed 11.10% and the Nasdaq has added 13.52% in just two months. Meanwhile interest rates, although higher than where we started the year, do not seem to be reading from the same playbook as stocks. If fixed income investors believed that all the risks have really moved to the sidelines, we should see rates considerably higher than where they are. It could be that bond investors are much more focused on the global economic risks, such as the lack of clarity in Europe or the evidence of a continued slowdown in China. No matter the reason, it does merit our attention in evaluating the most recent move.

There has been a lot of financial and economic data available over the last month, providing some clues about the health of the economy. Some would argue that we got “robbed” last year in the fourth quarter. According to Ed Yardeni, who has spent decades on Wall Street running investment strategy for several prominent firms, “Earnings were up almost 25 percent last year and the market took a dive at the end of last year, taking away about 6 percent from the S&P 500. Some of this is just catching up to the underlying fundamentals, which were really extraordinarily good.” After all the worry about an earnings slowdown late last year, according to FactSet, data earnings for the fourth quarter grew by 13.08 percent. GDP, perhaps one of the broadest tools to measure the economy, showed the economy grew at 2.6% in the fourth quarter. Although this is a slowdown from the 4.2% and 3.4% seen in the second and third quarter, it was higher than the 2.2% expected. From a seasonal and historic perspective, according to the Stock Trader’s Almanac, March and April are two of the best months for the S&P 500. In addition, according to LPL Financial, going back to 1950 when the S&P posts back to back gains in January and February, 92% of the time it is positive for the balance of the year.

There is no doubt there are signs telling us the headwinds are rising. Housing, which provides an economic barometer from several perspectives, has shown some signs of weakness. The recent housing boom has restored asset valuation for home owners, providing financial flexibility that disappeared after the financial crisis. Building has also provided a big piece of the recovery to the jobs market in many parts of the country, and affordability has provided the millennial generation the ability to acquire their first home. Today however, the combination of rising prices at the same time as rising supply, could spell trouble for the housing market. The median price of a home listed in February jumped 7 percent to $294,800, according to Realtor.com. For the last several years, rising prices have come along with a dwindling supply. Last month however, the number of listings rose 6% compared to one year ago. Buyers did turn out in January, but many attribute the move to the fall in interest rates during the month of December. With supply rising and affordability remaining a challenge, sellers are beginning to respond by slashing prices. Some of the largest metropolitan areas are starting to see the impact. Seattle, an overheated housing market, saw an 85 percent jump in listings, followed by San Francisco at 53 percent, and 30 percent in San Diego. As pricey and unsold listings pile up, home owners have begun to cut prices. In February, 39 of the 50 largest markets saw an increase in the number of price cuts. Las Vegas experienced a 19% increase in the number of listings offered at a reduced price. At the end of January there were 7,254 homes for sale in Las Vegas with no offer. For perspective, that is a 95% increase over a year ago. While the high end is oversupplied, the entry level home priced at 200,000 or below has 7% less listings than a year ago. This creates a structural problem to the housing market overall which, according to Michael Rehout, a housing analyst with J.P. Morgan, will lead to a more tepid housing market than we have seen over the last 1 to 2 years.

Consumer spending, which can often be linked to the housing market, also saw a decline in December. The drop in consumer spending was the largest since 2009 and came along with the first drop in personal income in more than three years. The decline was not limited to consumers, which represent about two thirds of GDP; factory activity also slowed to the lowest level since 2016. The ISM index remains at a level that indicates the economy for manufacturing is still in an expansion, however, it is decelerating. Lack of business and consumer spending is causing many to reduce their forecast of growth for the balance of 2019. One positive from lack of spending is the increased savings rate. The savings rate jumped to a three year high of 7.6% and consumer sentiment remains high. The accumulation of savings can help to bolster spending in the coming months. Regardless of some the recent weak numbers, the expectations for a recession in 2019 have declined. According to a survey of the members of the North American CFO Council, not a single member expects a recession this year. Although they downgraded the economy for the first time in 11 quarters and agree the economy faces challenges in the year ahead, they don’t believe it will be enough to cause a recession.

The signs we are seeing from housing and the broader economy align with the decision of the Federal Reserve to pause on raising rates. In his recent testimony before the U.S. Senate, Jerome Powell, Chair of the Federal Reserve, clarified his position in his statement noting that, “while we view the current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals… financial conditions are now less supportive of growth than they were earlier last year.” Their outlook on a recession, according to their own research, estimates only a 12% chance of a recession in the next 6 months and roughly a 25% probability for 2020 or 2021.

The markets have reminded us over the past several months that investing success cannot be measured over short periods of time. Markets are more accurate over longer periods of time, such as where we were in 2009 versus where we are today and the 300% gain the S&P 500 has seen. We have seen countless challenges over the last 10 years and will face more in the years ahead. Our investment process, which is focused on protecting wealth, helps us stay focused on the long term.

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