By Guest Blogger Doug Rowat
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We’re bullish on equity markets.
And for good reason. First, it far more often pays to have a positive market view than a negative view because bear markets typically last only 1-2 years whereas bull markets last 8-9 years. All things being equal, the odds are heavily in your favour to be bullish. But aside from what market history tells us, we also view current market conditions favourably: corporations remain profitable with Q2 US earnings season playing out better than many expected, US GDP is poised to grow at a reasonable 2.3% this year, valuations are not overextended with the S&P 500, for example, trading at a price-to-earnings discount to its three-year average (18.9x vs 20.2x), the world is (mostly) a peaceful place with developed nations, in particular, not at war, and the world’s largest central bank, the Federal Reserve, has some capacity (and a clear willingness) to stabilize markets if the economic picture deteriorates further.
However, in recent months we’ve made small, but deliberate, changes to reduce volatility and give our clients’ portfolios a more conservative tilt. And, as always, we’ve continued to maintain an overall diversified mix of safer assets.
Why? Because you can’t be an effective portfolio manager and disregard risk. So, while our overall view is favourable, there are areas for concern. So, to prove that we aren’t Pollyannas blind to the market’s weak spots, below are a few of the items that keep us awake at night. (For the record, we aren’t mentioning the more obvious market risks such as the US-China trade war or a no-deal Brexit—these are a given.)
The Fed’s capacity to help the economy is no longer unlimited. The nine rate increases that the Fed made from 2015 to 2019 certainly gave it some freedom to begin to cut interest rates now, but the most recent tightening cycle brought interest rates nowhere near the levels of previous cycles. Each of the previous four cycles, for example, brought the Fed’s benchmark overnight rate above 5.00%, often above 6.00%. This latest tightening cycle peaked at only 2.50%, leaving the Fed significantly less ‘wiggle room’ for rate cuts. The Fed doesn’t have the capacity, for example, to lower rates 10 times—including numerous 50 basis-point cuts—as it did during the financial crisis. Basically, the Fed fired all its bullets during the last recession and, fortunately, killed it. However, this time around, the Fed has far less ammo. And while the Fed has also been steadily reducing its balance sheet, its total assets still stand at a lofty US$3.8 trillion—69% higher than asset levels at the end of 2009.
The Federal Reserve’s ‘peak rate’ ain’t what it used to be
Source: Bloomberg, Turner Investments. A rate-hike cycle is defined as a period of multiple increases in the Federal funds benchmark rate. Any rate cut ends that cycle.
The US 10- and 2-year yield curve has inverted. We’ve heard the arguments that this time around this metric may not be as reliable a recession indicator as it’s been in the past; but let’s be honest, an inverted yield curve must be viewed as a concerning development. History tells us that such inversions are highly predictive of upcoming recessions, in fact, they’ve predicted every single one over the past 50 years. Why? Because the Fed often lowers interest rates to support a weakening economy. If this is the perception of the market, demand can get disproportionately weaker for short-term bonds (moving their yields higher) and stronger for long-term bonds (moving their yields lower). Simply put, if investors anticipate a weaker economy, they don’t want to hold short-term bonds that they’re soon going to have to roll into new bonds with lower yields.
There was one false-positive in the 1960s, but the inverted yield curve is now on a seven-consecutive-recession prediction streak. An inverted yield curve can’t be ignored.
The Inversion!
Source: Bloomberg, Turner Investments
US consumers are too confident. We know that consumer spending accounts for almost 70% of US GDP, so it can’t be bad that consumer confidence sits at elevated levels, right? Unfortunately, US consumers are notoriously poor at reading actual economic and market conditions. How consumers ‘feel’ is often an excellent contrary market indicator. When US consumers are euphoric (and it’s hard to view current confidence levels as anything but—see chart) then equity markets are often near their peak. Conversely, an extremely pessimistic consumer equates to a strong buy signal. However, it’s fair to say that the current message from the consumer is that markets are overbought.
Elevated consumer confidence often bad news for equity markets
Source: Bloomberg, Turner Investments
So, these are a few of the risks that, admittedly, make us highly uncomfortable. Ultimately though, we have to formulate an outlook and that outlook remains, as I’ve mentioned, positive.
However, it’s the awareness of risk that compels us to always maintain a balance of safer assets in client portfolios. Our positive outlook could be wrong and an undiversified portfolio will remind you very quickly just how painful being wrong can be.
62 comments ↓
Great post and insight
It’s smart to keep a keen edge on your sword, even if you never have to draw it!
Wow three Debby downer posts in a row. I feel like fools should be parted with their money. You guys shouldn’t be trying to calm the masses before the storm in the hopes that they don’t panic sell.
The greater the drop the higher the bounce.
I rarely see you talk about the TSX everything is S&P—Is there no love for Canada?
Your posts are always so well written and informative! Thanks for sharing your knowledge.
Complacency (when it comes to investing) leads to consternation. Diversification leads to delight.
I don’t think comparing bull market length versus bear market length is prudent. A bear market of 2 years can take down profits of a bull market of 10 years so back at square one. Plus factor in fees etc even worse. And typically folks can’t hold money for decades they’ll need funds ongoing. Unless one is in the top 5%.
@#3 PA
“I rarely see you talk about the TSX everything is S&P—Is there no love for Canada?”
+++++
Unfortunately, the sad reality is…compared to US markets, Asia, etc.
The TSX is irrelevant in the grand scheme of world wide investing.
Hey Robax, I put this one up the other day, thought you might be interested.
I asked my wife a trick question the other day regarding this.
I asked “If you had 5 billion dollars would you buy a The Cowboys or The Yankees?”
She responded Yankees.
Then she said “What about you?”
I said I would purchase my beloved Manchester United for 3.8 billion and then live off the other 1.2 billion…
M45BC
Most Valuable Sports Teams in the World:
1. Dallas Cowboys: $5 billion
2. New York Yankees: $4.6 billion
3. Real Madrid: $4.24 billion
4. Barcelona: $4.02 billion
5. New York Knicks: $4 billion
6. Manchester United: $3.81 billion
7. New England Patriots: $3.8 billion
8. Los Angeles Lakers: $3.7 billion
9. Golden State Warriors: $3.5 billion
10. Los Angeles Dodgers: $3.3 billion
https://howmuch.net/articles/worlds-most-valuable-sport-teams
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Great overall view from the latest blogs of all.
Trump and Xi; gave up on T2 yrs ago; will determine what is next; well; also the millions that are over there heads right now in Canada alone; never mind the rest of them in other countries.
“Unfortunately, US consumers are notoriously poor at reading actual economic and market conditions.”
This aligns well with the fact that 2/3rds of Americans can’t afford a $500 emergency car repair. This 66% or over 200 million are living paycheck to paycheck. God help them if they get sick in the land that lack universal health care… America the Great!!!
I have published PMI (Purchasing Managers’ Index) charts comparing Canada and the U.S. along with the Ivey Canadian Suppliers Index and a chart showing U.S. PMI with an ovelay of U.S. GDP … all here:
http://www.chpc.biz/history-readings/pmi-update
The above is after 10 years of Zirp and Nirp.
Just wondering…
Given all the worrisome indicators you’ve outlined above, did you decide to diversify into gold equities at all?
I keep hearing that gold is negatively correlated to SP500 most of the time (sort of a ‘safe-haven’, especially during ‘uncertain’ times), so a small allocation is prudent.
Thoughts?
#7 crowdedelevatorfartz on 08.24.19 at 5:06 pm
@#3 PA
“I rarely see you talk about the TSX everything is S&P—Is there no love for Canada?”
+++++
Unfortunately, the sad reality is…compared to US markets, Asia, etc.
The TSX is irrelevant in the grand scheme of world wide investing.
…………………………
I would add: why invest in a country that is not business friendly, over taxed, over regulated, and with a weak central government that can’t even build infrastructure that is in the national interest?
If the US goes into recession here we will see negative interest rates on long term Canadian bonds.
Does the Canadian housing market follow the same pattern then? Except Calgary seeing as we have our own recession while the rest of Canada toots along
At the end of the month all those distributions roll in from dividend equity, pref and bond ETFs, just like they do every month. Sweet.
Market volatility is just a lot of noise most retail investors should learn to ignore. Unfortunately some can’t.
For those folk it might make sense to hire a pro instead while getting on with ones life.
There are better things to pursue than picking a fight with Mr. Market.
So…. If one thinks the sp500 is going to drop 35-40% over the next 2 years, it’s still a good idea to be invested??
@#14 Yukon Elvis
“why invest in a country that is not business friendly, over taxed, over regulated, and with a weak central government that can’t even build infrastructure that is in the national interest?”
++++
Because we’re nice people who apologize a lot?
However, in recent months we’ve made small, but deliberate, changes to reduce volatility and give our clients’ portfolios a more conservative tilt. -RL
>
Ryan, just curious, What was the small changes to reduce volatility and providing a conservative tilt ? Does recent months means within past 3 months ?
I cannot understand why there has been no apology for Russia yet.
I thought August would be a pretty calm month but Trump tweets and algorithms are making the stock markets go bi-polar.
#6 Alessio on 08.24.19 at 4:59 pm
I don’t think comparing bull market length versus bear market length is prudent. A bear market of 2 years can take down profits of a bull market of 10 years so back at square one. Plus factor in fees etc even worse. And typically folks can’t hold money for decades…
—-
On the contrary, typically they do. And comparing bull and bear market length is a useful history lesson. Most of the time, capital markets are a great place to be invested.
—Doug
#17 espressobob
You’re right; but foresight and just speaking to the average Joe or Jane helps alot as well!
#19 crowdedelevatorfartz on 08.24.19 at 6:41 pm
@#14 Yukon Elvis
“why invest in a country that is not business friendly, over taxed, over regulated, and with a weak central government that can’t even build infrastructure that is in the national interest?”
++++
Because we’re nice people who apologize a lot?
……………………….
Yah, maybe we should apologize to China, India, Saudi Arabia, the Philippines, and a few others who used to like us and do business with us but now don’t buy our stuff and have hard feelings toward us.
#21 No Apology
No worries; T2 will come up with an apology to Putin just before the election so that those Ontario sheeples that know no better will think that it is the greatest thing ever and without thinking will cross that little “X” in their favor! Mind boggling! It is that pathetic!!! No wonder those with half a brain no longer vote although they know what the outcome will be but could no longer give a sh*t!
Hey, soon enough we will be a nation of people declaring bankruptcy; can hardly wait, not for the suffering, but that we can finally make that change.
#22–No difference it’s August as Trump doesn’t drink, smoke, so no vices. So he’s go-go-go on the business high
Guess I’m not one of the scaredy cats selling on emotion, but I’m stuck in a mutual fund work match RRSP crummy deal so maybe it’ll pay off in those respects due to minus the emotional/subjective influences of buy/sell whims. Yay? Not
XMU…one of the best etf to hold in your portfolio to ride the bumps in the stock market
Household Debt and Savings Question
We often see (average) household Total debt expressed as a percent of annual income. What is it about 170%?
Garth recently showed (August 21, Losing It) a great long term chart of (average or total) Annual household savings rate as a percent of I believe annual income. It was quite low, down under two percent, vastly lower than historic averages that were at times over 15% even towards 20% with a long term average of probably 8%.
That’s interesting. But the two measures are different. I’d like to see the TOTAL average household savings as a percent of average household income.
Could it be that the average household debt rate is 170% of annual income and at the same time the average household total savings is something close to that as well.
I mean many people have both debt and savings. RRSP plus mortgage. RRSP plus car loan.
If the average household saved 5% (or more) annually for 40 years (as in the past), what level of savings as a percent of income would they have.
Yes, I am rambling. But some points are: No one is average. A household often tends to be in debt in the early years and then moves into net savings.
If we are awash in debt, it is owed to someone. If not households then corporations and pension funds?
President Trump got a massive slap down by President of European Summit, Donald Tusk, on the first day of the G7. At least he didn’t use the trigger word, “absurd”. Are retaliatory tariffs in store for the EU by the world’s greatest counter puncher?
https://youtu.be/YvFnPMSYJk0
The sheep are sleeping.
The wolves are slowly coming out the forest.
Be careful folks!!!
The average household debt may be 170% of annual income. At the same time the average household net worth is certainly positive and perhaps more than 170% of income?
So I am not having a cow about household debt.
I am however reserving the right to have a cow about Trump and his destructive trade war. While he’d probably like a real war, a trade war will do. He totally wants Americans to view the whole outside global world as the enemy and he their savior. It’s working for him so far.
Only 30% of Americans currently have a favourable impression of the president. Not sure it is working. – Garth
#32 Shawn Allen
Respect your opinion but wow just wow! Not defending the guy but I do understand where he is coming from. All the naysayers; just look at the big picture; see where it all went wrong; how many jobs were lost from greed, lies, promises that were never delivered and look at where we are today; is it better, or worse, are we living happier lives, I would suspect a big fat “NO”! Record amount of addicts, suicides, depression, and most distressing is the lack of humanity. I just depressed the hell out of myself; last post for tonight.
I wish all of you a glorious night with your loved one’s, friends, or just vegging out to your favorite thing to do; life is short, just enjoy!!
#24 Acdel.
Emotion run many portfolios. Battling day to day market moves can drive one crazy.
All I’m saying is in some cases professional management would serve an investor well while paying a low fee for services rendered.
A dumbass mistake on the part of an amateur can be far more costly.
Emotions are a funny thing.
Now that i swithched reading from phone to monitor i realized that dog have 2 different eyes.
Some time ago someone here in comment section posted small vignette from his childhood, about dog with different eyes and his friend who was also like me speaking with an accent. I remember what he wrote, kind of: blah blah, than my friend sad; dog one eye brown other one not the same.
Probably same way i would describe dog eyes.
Famous people that i know that have one eye color other one not same.
My Aunt
Iron Man
Mila Kunis
Even when the path seems obvious, there’s no way to predict the future. We mustn’t overestimate our abilities.
The best we can do is eliminate as much risk as possible. Diversification is our friend.
https://dumbwealth.com/
#11. America is still the most free country in the world. Still a great country. Our neighbor.
Doug, Are preferreds a sucker’s bet right now or the deal of this century for a long term holding? Thank-You Sir.
Canada announces it will be the next country to send astronauts to the moon. The Canadian astronauts will be travelling to the moon on the Apollo G.
#34 espressobob
Fair enough, respected!
My gut tells me to go 20 percent cash. I see a sell off coming in the next 8 weeks.
1) Trump has broken everything he has touched.
2) Rest of the G7 waking up to this Captain Obvious situation
3) Trade wars and everything negative about them is adding up.
4)We have potential wars all over the place.
Add all that up and it’s Plop Plop Fizz Fizz.
#9 oh bouy on 08.24.19 at 5:22 pm
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———————–
How can oh bouy get deleted? All he writes is ‘lol’ plus maybe one or two real words
Best non conventional indicator that was a good record is RV sales have turned down.
Only 12% of Republicans disapprove of T.
The teddy bear has called it..but timing is unknown
https://twitter.com/EconguyRosie?lang=en
deflation stagflation with highly volatile markets next 10 years!
#13 Tyberius on 08.24.19 at 5:57 pm
Just wondering…
Given all the worrisome indicators you’ve outlined above, did you decide to diversify into gold equities at all?
I keep hearing that gold is negatively correlated to SP500 most of the time (sort of a ‘safe-haven’, especially during ‘uncertain’ times), so a small allocation is prudent.
Thoughts?
—
Low-risk bonds provide a better negative correlation to equities. And volatility control is always a focus for us. We have enough portfolio components that, historically speaking, could drop 20% or more in a year, we don’t need another.
–Doug
#18 Where are you now? on 08.24.19 at 6:40 pm
So…. If one thinks the sp500 is going to drop 35-40% over the next 2 years, it’s still a good idea to be invested??
—————————————————-
Who thinks that? You and your talking squirrel?
Tell you what: you go all cash now and we’ll talk again in 2 years. Who knows- your squirrel could be right!
#72 Morty on 08.24.19 at 7:29 am
#62 Ponzius Pilatus on 08.23.19 at 10:57 pm
“…On the bright side, Koch has departed.”
Yep, it is a better world today without Mr. Koch. Good riddance!
David Koch donated hundreds of millions to medical research. He gave equal amounts to public institutions from the Museum for Modern Art to the Smithonian and MIT. He employed thousands. And you, who stand in judgement, have done what, exactly? – Garth
————
Garth,
We, the thousands of volunteers who coach sports, man the food banks etc, while working to support their families and their communities without having 60 billion to our name, find this comment disrespectful.
We are the backbone of a civil society and the true philantrophists.
Not some billionaire who spends a meagre part of his wealth putting his name on a hospital block.
And writing it off advertising expense.
That’s pretty sick.
And write it of
Great post Doug.
Just know this dogs. As long as Trump is in the white house it’s rock and roll on equities.
The globalists, and China are doing everything possible to take down Orange Man.. Won’t work. Q is real…
Anyone catch Mark Carney last week… The sound of desperation..
Re: #15 Shawn on 08.24.19 at 6:03 pm
We already have negative yields in Canada. All the bond yields are below the present inflation rate in Canada.
Re: #18 Where are you now? on 08.24.19 at 6:40 pm
The year 2021 is the year to be very worried about.
Bonds never lie, risk is elevated and some folks have the vision that global markets have indeed peaked and will be shaken not stirred in the short term.
Most investors will be blindsided, expect massive sector rotations during such corrections.
Good luck to all, may the force be with you.
I went over dozens of charts over the weekend, I was struck by a large number of multi year Head & Shoulder patterns that are sitting on necklines waiting for a break down. Most Canadian banks and other big names. We could be on a verge of a good flush
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Stay calm.
Everything is fine.
It’s all going to be okay.
There’s nothing to worry about.
https://www.youtube.com/watch?v=iRscbQQVRTY
Two posts from newbies in a row. Gartho’s Gone Golfing!
Where are the customers’ tee times :-)
Biggest news this week. The major airline you’ve never heard of. CJT.TO. All overnight freight and has Purolator contract. Opening up to AMZN
“Cargojet Inc. has entered into a new strategic agreement with Amazon.com NV Investment Holdings LLC, an affiliate of Amazon.com.ca Inc. Cargojet is a key air cargo carrier for Amazon’s middle mile transportation in Canada. This agreement is in conjunction with Amazon’s and Cargojet’s existing commercial agreement for overnight air cargo services and charters and to incentivize growth in Amazon’s utilization of those services to support fast delivery for Amazon customers in Canada. Under the new strategic agreement, Cargojet will issue warrants to Amazon to purchase variable voting shares that will vest based on the achievement of commercial milestones related to Amazon’s business with Cargojet”
#46 Ponzius Pilatus on 08.25.19 at 12:02 am
#72 Morty on 08.24.19 at 7:29 am
#62 Ponzius Pilatus on 08.23.19 at 10:57 pm
“…On the bright side, Koch has departed.”
Yep, it is a better world today without Mr. Koch. Good riddance!
David Koch donated hundreds of millions to medical research. He gave equal amounts to public institutions from the Museum for Modern Art to the Smithonian and MIT. He employed thousands. And you, who stand in judgement, have done what, exactly? – Garth
—————————-
We, the thousands of volunteers who coach sports, man the food banks etc, while working to support their families and their communities without having 60 billion to our name, find this comment disrespectful.
We are the backbone of a civil society and the true philantrophists.
Not some billionaire who spends a meagre part of his wealth putting his name on a hospital block.
And writing it off advertising expense.
That’s pretty sick.
—————————–
Volunteering isn’t philanthropy.
The people who benefitted from Koch’s contributions aren’t complaining.
But you are. Bravo.
Hey Flop – you missed one!
Most Valuable Sports Teams in the World:
1. Dallas Cowboys: $5 billion
2. New York Yankees: $4.6 billion
3. Real Madrid: $4.24 billion
4. Barcelona: $4.02 billion
5. New York Knicks: $4 billion
6. Manchester United: $3.81 billion
7. New England Patriots: $3.8 billion
8. Los Angeles Lakers: $3.7 billion
9. Golden State Warriors: $3.5 billion
10. Los Angeles Dodgers: $3.3 billion
But what about the Toronto Make Believes!?
They are now….(Drum Roll Please!!!!)
125 DAYS WITHOUT A LOSS!!!
Great Team for a Great City!
They are EASILY worth $50 BILLION, and the locals will be all too happy to pay :)
Get your wallets out, Toronturds!!!
Right, the numbers look great. What the negative illusion is all about is a concentrated globalist Trump Hate campaign to kill any chance of Trump being reelected so that their plans for a third world wealth transfer and Immigration scheme can go ahead. They are fighting to change the world as we know it. Bring it on. Trump is our champion against the evil army of snowflakes.
PM Harper was attacked by a wave of globalist hate money. Canadians didn’t realise what was happening until it was too late. Being naive and complacent may have killed our country.
But, if common sense survives the current CBC tsunami of globalistb propaganda we should all have a decent future.
@#14 Yukon Elvis on 08.24.19 at 5:59 pm
@#7 crowdedelevatorfartz on 08.24.19 at 5:06 pm
@#3 PA
“I rarely see you talk about the TSX everything is S&P—Is there no love for Canada?”
+++++
Unfortunately, the sad reality is…compared to US markets, Asia, etc.
The TSX is irrelevant in the grand scheme of world wide investing.
…………………………
I would add: why invest in a country that is not business friendly, over taxed, over regulated, and with a weak central government that can’t even build infrastructure that is in the national interest?
——-
Although I agree with both points raised (especially the attack on business), my point was slightly different. Regardless of the size and place in the world, we haven’t talked much about the TSX vs anything else even the S&P- but living here, it behoves us to have some understanding of the Canadian nuts and bolts. Even in a balanced portfolio there should be some allocation given to Canada. Just look at VBal and XBal…
@ #46
Well said Garth!
Ideally we can build a society and economy that doesn’t RELY on the “generosity and kindness” of the ultra rich.
I guess everyone believes the business cycle isn’t one.
Even if the Democrats win the election in 2020, Dear Orange One will never accept it or ever let it go. He will call it fake results and would rather incite a civil war before accepting defeat.He will always have Twitter, he will always be texting to his base , we will never hear “Trump Silence “ again. IMHO
Kool Aid, bonds never lie. What are you on something? The bond markets around the world are so manipulated by QE, printing money by central banks to buy trillions of dollars in bonds not from people’s savings, investments that it is a joke now.
You really think they are telling us the truth about how much they have on their balance sheets. It is such a joke, in our face now they lie and don’t care anymore. We are not back in the 80’s or 90’s anymore guys.