Wednesday, February 7, 2018

Notations From the Grid (Weekly Edition): On the Recent Stock Market Sell-Off


Our team has been assessing the state of the markets as we received this from Edward Jones as our team continues to remain hopeful as epitomized by this image from our Founders' Archive


4 Things to Know About This Market Pullback

The stock market has pulled back in recent days, with U.S. equities posting their largest drop in two years. The size and speed of the selloff may feel alarming, but there's no cause for panic. We believe conditions are more positive than the reaction of the past few days would suggest, which is why we think this is a short-term respite within the ongoing bull market. Here are four things to know about this pullback: 
1. The source of this selloff isn't sinister. We think there are two primary drivers behind the decline:

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  • Rising rates - Interestingly, it's actually good news behind the market move. A 17-year low in unemployment and continued solid job growth have begun to spur a lift in wages. Last week's jobs report showed that, after averaging 2.2% growth since 2010, wages increased at the strongest rate since 2009. This, however, began to foster fears of rising inflation, leading to concerns that the Federal Reserve will tighten policy faster, sending longer-term interest rates to their highest level since 2014. Stocks have reacted negatively as expectations of higher rates have been re calibrated across equity market values. 
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  • Pent-up selling - It had been more than 400 days since the last 5% pullback. In fact, the largest drop in 2017 was just 2.8%. With stocks delivering strong, steady gains over the past two years, with no noteworthy dips along the way, we think this selloff is likely being exacerbated by pent-up selling demand and short-term profit taking.

    2. We've seen similar knee-jerk reactions before. The daily point declines in the Dow appear staggering, but this is not uncharted territory. We've experienced similar sharp reactions in the market in recent years, with short-term selling giving way to healthy rebounds as the dust settled and markets reconnected to broader fundamental conditions:*

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  • In August 2015, the market fell 11.2% in about a week, with the Dow shedding 1,879 points in six days, including an intraday drop of 1,100 points. The stock market had a return of 12.5% over the next three months. 
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  • Stocks dropped 12.0% in the first six weeks of 2016, including a seven-day stretch in which the Dow dropped 1,375 points. The market then gained 13.5% over the following three months. 
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  • Following the Brexit vote in June 2016, stocks dropped 5.3% in three days, including an 871-point drop for the Dow. Stocks posted a return of 8.6% over the next three months.

    We don't think this precludes the market from further volatility in the coming days or weeks, but we do think this dust will settle as well.
    3. The fundamentals are actually improving. Over short periods of time, markets can frequently be led by headlines and emotion. But over time, we expect economic conditions and the direction of corporate earnings to drive performance. The U.S. economy is near full employment, consumer and business sentiment has risen dramatically, manufacturing and service activity is at multi-year highs, and GDP growth in 2018 is poised to be the strongest since 2015. Similar trends are playing out around the globe, where recent data suggest economic growth is on the upswing. Equally positive, corporate profits are rising at a healthy clip, with earnings expected to rise at a double-digit pace this year.
    Not all market pullbacks are created equal. Corrections driven by emerging cracks in the economic foundation can turn into bear markets as a recession emerges and corporate profits decline. But pullbacks that occur against the backdrop of sustained economic expansion and rising corporate profits - as is the case currently - present attractive opportunities for long-term investors.
    4. Perspective prevents panic. Even with the recent decline, stocks are simply back to the level we were at roughly two months ago. More importantly, equities are still up an incredible 47% over the past two years.* We just concluded the longest stretch on record without a 3% pullback. So while this selloff may feel extraordinary, we're coming off an extraordinary rally. The return to more normal levels of volatility may feel uncomfortable, and while we think volatility will be the norm rather than the exception moving forward, we think the broader bull market still has gas left in the tank.
    Market pullbacks don't come with an expiration date. But when the market's fundamental underpinnings are strong, we do know that declines are typically temporary. After an extended period of record-high stock prices and record-low volatility, the current dip offers an opportunity to:1. Review your situation, comparing your portfolio and your progress to your goals to ensure you're still on track.
    2. Reassess your tolerance for risk, making sure you're comfortable with your level of risk and that it is aligned with your long-term strategy.
    3. Rebalance, where appropriate. Staying the course may mean no action is necessary. At the same time, we think the market's decline is creating an attractive opportunity to rebalance to the mix of equity and fixed income appropriate for your situation, including (where appropriate) capitalizing on the pullback.
    Your financial advisor understands what's important to you and uses an established process in partnering with you to help keep you on track. Working with him or her will help you understand how this market reaction may impact your situation and actions you can take to stay well-positioned toward your goals. 
    Craig Fehr, CFA
    Investment Strategist
    *
    Source: Bloomberg, S&P 500 index total return. Past performance is not a guarantee of what will happen in the future.

    Tuesday, February 6, 2018

    Notations On Our World (Special Tuesday Edition): @POTUS Memo Combat as @GOP React to @DevinNunes Dud Memo: The Daily Show


    Trevor Noah shared observations about the aftermath of #NunesMemo as the Democratic Alternative awaits.    We will use this space to share observations later on this week once the White House approves the release.    As we went to press, we understand that President Trump will be approving the release of the Democratic Rebuttal.

    Monday, February 5, 2018

    Notations On Our World (Weekly Edition): Out & About w/the latest re @realDonaldTrump

    Donald Trump Calls For Unity (Source: @Kaltoons) 

    Donald Trump Reflects Upon #Mueller (Source; @KalToons) 


    It has been quite a morning after quite a week in Washington, D.C as @KalToons once again captured the sentiments at hand.

    Earlier this morning, President Trump launched  another "Twitter storm" attacking Congressman Adam Schiff, characterizing protests in the UK regarding the predicament of the National Health Service (earning a rebuke from the UK Prime Minister having her own profound challenges with #Brexit):

    Teresa May Planning For the Future (Courtesy: @KalToons) 


    Another Interesting Day in Washington as we share selected snapshots of our "Grid" Assessment as we present this "snapshot" from Congressman Gowdy from the US House Intelligence Committee that was one of the persons who actually read the Intelligence background information: 






    This one is from the Fortune's Alan Murray on the predicament of the Markets as the Dow Continued its' dive today 
    FEBRUARY 5, 2018
    Good morning.
    A new Fed chief, Jay Powell, takes office in Foggy Bottom this morning. Back in October, I wrote that the “odds are high…he will face a financial crisis early in his term.” I didn’t guess it would start on day one… or indeed, three days before day one. So much for the honeymoon.
    The Fed’s main job is intangible—to ensure confidence in money, markets and the economy. But Friday’s 665 point drop in the Dow measured confidence contracting. Traders are suddenly worried about interest rates (although anyone older than 30 has to be amused that 2.85% on the Treasury 10-year is a source of panic), worried about inflation (although after the last decade of stagnant wages, Friday’s 2.9% rise should be cheered, not jeered), and worried about a tax-fueled spike in growth (with this reportfrom Powell’s Atlanta colleagues leading the way.) A more legitimate reason for concern was last week’s report showing productivity fell in the fourth quarter—since ultimately, rising productivity is the only way growth can be sustained.
    I’m guessing Alan Greenspan’s “bubble” comments last week also had something to do with the swoon. Greenspan himself, of course, was tested by the markets on Black Monday in 1987, only two months after taking office, when the Dow fell 508 points. (I know… it’s a much bigger percentage: 23% versus 2.6%.) Greenspan’s smooth handling of that crisis helped reinstill confidence. And it’s worth noting that expansion continued for three more years.
    In any event, probably wise to buckle up. The Fed’s historic, decade-long experiment with hyper-low interest rates is coming to an end. And the return to normalcy is likely to be anything but normal. Let’s hope Powell is up to the job.
    By the way, Janet Yellen announced Friday she’s joining Brookings’ Hutchins Center for Fiscal and Monetary Policy, funded by Silver Lake co-founder Glenn Hutchins and headed by my former Wall Street Journal colleague David Wessel. (It’s also home to Yellen’s predecessor, Ben Bernanke.) As a send-off, Powell turned his coat collar up, in honor of Yellen’s preferred power-fashion.