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2019-Q2 Market Commentary

| April 23, 2019
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What Goes Up Must Come Down?

From one of the worst quarters at the end of 2018 to one of the best quarters in 1Q 2019. Markets around the world rejoiced when the Federal Reserve “decided” to take its foot off the gas regarding interest rates. In October of 2018, the FED projections were for four more rate hikes in 2019, plus one at the December 2018 meeting. In addition, they were on self-proclaimed “autopilot” for the balance sheet reduction (QT). By the time the December meeting arrived, the FED had lowered their expectations from four increases to two rate hikes and Quantitative Tightening (QT) was no longer on autopilot but would be looked at in relation to the overall economy.

In the span of just two months, the Federal Reserve completely reversed itself regarding their view of appropriate monetary policy. That was an unprecedented reversal and one that we think will continue to prop up the market and delay any real price discovery. So what does that mean?  The party was starting to wind down until the FED came in and spiked the punchbowl again. So long as this condition maintains itself, the path of least resistance should be higher. The bigger question has to be, if the FED was so quick to turn when the markets sold off, how quick will they be to turn again? We think the FED has lost whatever bit of credibility it had and now is a shill of the markets and politicians. They will never admit that, but what else is left to assume?

Money flow, which is a measure of money going into the market or coming out of the market, started turning positive at the very end of last year and broke out in mid-February. That is another sign that this market has some legs under it and is likely to continue up until something causes money flow to stop. That could be a geopolitical event, the FED reversing course, or any number of things.  Until then, we will continue to watch money flow and look for evidence that a trend reversal is coming.

Longer term, we have seen the yield curve go negative at certain points but has yet to fully “invert.” Historically when the yield curve inverts, that sends a warning that the economy is slowing and that a recession is on the horizon (though the horizon can be, and typically is, months out). We don’t see that in the US, but certainly many countries around the world have seen a significant slowdown. That slowdown seemed to be abating toward the end of the quarter and economic numbers started getting marginally better (Geek speak…The rate of change has slowed, which for you math wizards is the second derivative).

Our friends at Guggenheim Investments see a recession in 2020, but acknowledge that the FED could push that back with further monetary accommodations. Nevertheless, we have to realize that we are late in the cycle and at some point, the cycle will roll over and we will need to take appropriate measures. For now, things look ok, and we remain invested across a diversified portfolio that leans most heavily into US equities, while maintaining what we see as a necessary buffer against potential downside moves.

As always, we encourage you to call or email if you wish to have a longer discussion surrounding these or any topics – and certainly we look forward to speaking with you. If you have friends or family that you would like to pass this along to, please do.

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