Analytical Grab Bag

With all the market volatility over the past few weeks I thought I’d touch on a few recent data points about the economy and markets.

Bottom line, we’re in a very mixed investing environment right now, so it’s natural to feel confused and even a little frightened about the variety of headlines coming at us.

The charts below come from my research partners at Bespoke Investment Group, but the commentary is mine.

Investor Sentiment

The American Association of Individual Investors regularly publishes a survey of members to gauge sentiment. As you could imagine, investors frequently change their minds about whether they’re “bullish” or “bearish”. Known as a coincident indicator because it reflects what’s happening in the markets now, when markets are down investors typically report being negative on stocks (bearish) and positive (bullish) when the market is up. We want to watch for unnecessarily large shifts in sentiment. As we see in the following chart, the recent surge in bearishness has been pretty extreme (far right side - straight up versus a more measured increase).

Investor sentiment is also seen as a contrarian indicator because, frankly, individual investors tend to be reactionary and turn negative or positive at the wrong times. Extreme spikes in bearishness typically imply better returns for stocks in the near-term, but we’re kind of in uncharted territory given how much uncertainty is created by proclamations from the POTUS Twitter account. It will be interesting to see how sentiment changes in the coming weeks. But for now, individual investors are decidedly negative when it comes to stocks.

Small Business Optimism

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Inversions and Flows

I’ve mentioned in recent weeks about the “yield curve” being inverted. This happens when bond yields are backwards and short-term bonds yield more than long-term. Since this situation is a near-perfect indicator of a coming recession it’s absolutely something to pay attention to. But is the bond market actually telling us a recession is coming, or could it be pulling a head fake? What about investor sentiment? What’s that telling us?

The yield curve briefly “uninverted” last week after several weeks of inversion before inverting again. Sounds a little strange, right? Bond investors are currently betting with 100% certainty that the Federal Reserve will lower interest rates when they meet at the end of this month. Investors are also pricing in more cuts later this year. Presumably, the only reason the Fed would cut rates is if they think we’re at risk of sliding into recession, so basically that’s what the bond market is telling us. As we edge closer however, the bond market is fidgeting a bit with anticipation and so is the stock market.

Stock investors love declining interest rates because cheaper money helps juice stock prices a little longer, even if it just delays the inevitable. This thinking is what has, at least in part, been driving stock prices higher lately. But it’s interesting that even though stock market indexes like the S&P 500 have hit record highs (the S&P closed over 3,000 for the first time last week), typical “retail” investors have for many months largely been shunning stocks in favor of bonds.

Monitoring “fund flows” is important because retail investor sentiment is often seen as a contrarian indicator. They buy late, buy too much, and generally crowd in after the “smart money” has already started leaving (think lines out the door at a local brokerage office as investors waited to buy tech stocks in early 2000 just before the bubble burst). That retail investors are generally sour on stocks is telling and could mean the markets and the economy have more life in them after all, even if the Federal Reserve sees fit to lower interest rates.

The following comes from my research partners at Bespoke Investment Group and shows fund flows into and out of stock and bond mutual funds. Look at the last chart and compare the selling retail investors did in January following the lows last December. Retail investors sold almost as much as they did during the depths of the Financial Crisis. Was last December like the fall of 2008? Some investors certainly thought so. Where’s a level head when you need one?

From Bespoke

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Quarterly Update

The second quarter of 2019 (Q2) seemed full of continued trade-related market volatility and speculation about interest rates. Both categories each sent the markets down and then up again during the quarter. While May saw stocks fall 6+%, the quarter ended on a high note brought on by, you guessed it, more news about trade and interest rates.

Here’s a summary of how major market indexes ended the quarter and year-to-date, respectively (as a reminder, the YTD numbers look very strong, but this is off deep lows in December):

  • S&P 500: up 4.3%, up 18.5%
  • Russell 2000 (small company stocks): up 2.1%, up 17%
  • MSCI EAFE (foreign stocks): up 4%, up 14.5%
  • MSCI EM (emerging markets): up 0.7%, up 10.8%
  • U.S. Aggregate Bonds: up 3.1%, up 6.1%

The financial sector was the top performer during Q2, showing growth of about 8%. Technology continued its strong performance and is the best performing sector this year, up about 27% YTD. Energy stocks performed poorly, down about 3% during the quarter. Although the sector performed well during June as oil prices rose to the high-$50’s per barrel, it wasn’t enough to make up for poor performance during April and May. Gold was up as well, about 10% YTD with almost all that performance happening in June.

As has become all too familiar lately, trade rhetoric and geopolitical concerns caused a lot of market volatility during Q2, both positive and negative. April and May saw more tweets from President Trump about potential new tariffs directed at China followed by a short-term tariff-related row with Mexico. The latter ended up fizzling but was enough to add a layer of uncertainty to markets already digesting the resignation of the British PM after failing to deliver Brexit. Much of this tension eased, however, as we entered June and markets took off for the remainder of the quarter.

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There are times when I wonder how I got to be so lucky. I have a wonderful family, good health and work that I truly enjoy. On top of that, this month I get to celebrate five years of being my own boss. While it’s been far from easy, it’s absolutely been fun, or at least mostly fun.

Back in 2014 my family and I had finally made the decision I’d been pondering for a couple of years – to go out on my own and start Ridgeview Financial Planning. Deciding to open your own business is tough anytime, but as the primary wage earner in our household with two young kids it was a huge risk. Fortunately, it’s been paying off and all the tension is starting to ease a bit.

But the first year or so was pretty rocky. Trouble started right out of the gate when I was sued by my former firm. In a strange twist, the lawsuit information showed up on our wedding anniversary in late-August, less than a month after having opened shop. I came to find out this was a pattern used by brokerage firms to, essentially, scare the crap out of anyone who leaves to start their own business. What followed was a year of back-and-forth that caused a ton of anxiety for my family and me but ultimately led to a whole lot of nothing (no money owed, no fault on my part, just lots of legal fees…).

While I was still going at full steam that first year, business really perked up once the lawsuit was settled. I moved into my first office after working from home, eventually moving into a slightly better office a year later. And then, after a couple of tries at working with virtual assistants, last summer I hired a real local person, Brayden, whom many of you have interacted with.

All told, it’s been a great five years and I’m eagerly awaiting the next five and beyond. To celebrate this anniversary, as well as our 20yr wedding anniversary (my wife is amazing for putting up with me this long), as I’ve done in the past, I’m taking a few weeks off from writing this weekly blog. We’re also taking a vacation! I’ll still be monitoring everything and will be accessible via email and phone if necessary, just won’t be setting any meetings.

I am extremely grateful for and humbled by the trust you place in me as your financial planner. It is my honor to be your partner on the journey and I hope to be so for many years to come.

With thanks and gratitude, 


Have questions? Ask me. I can help.

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Declaring Independence

Independence Day and the days around it have been a time of reflection for me in recent years. It was just about five years ago that I declared my own personal independence by resigning from the brokerage industry where I had worked since 2003.

As you can imagine, this was a difficult decision to make. I was the primary earner in our family and our two kids, ages 8 and 12 at the time, needed more stability than typically comes with a parent starting a new business. But it was (and is) important to me to work with clients more effectively and, following many discussions with my amazing wife, we decided it was worth the risk to go out on my own.

After feeling the swift kick from my employer when I resigned, I got to work and after a few rough months I was up and running full steam. One of the first things I did was to join a group you’ve likely heard of, the National Association of Personal Financial Advisors (NAPFA). This is an elite group and I had my sights set on membership from the very beginning.

To be a NAPFA member you must:

  • Be a Certified Financial Planner in good standing
  • Provide holistic financial planning services
  • Work in a fee-only capacity (receiving zero commissions or other monies from third parties)
  • Sign a fiduciary oath

After applying for membership and submitting a financial plan for peer review I was granted membership a few months after I started my practice. Since then I’ve been doing my continuing education (another requirement) and have generally been plugging along working with clients.

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The Secure Act

Recently the U.S. House of Representatives passed a bipartisan bill aimed at modernizing and promoting retirement savings. There hasn’t been a major update to the retirement landscape since the Pension Protection Act of 2006, so meaningful movement here is overdue. Known as the “Secure Act”, the legislation passed the House in late-May but has stalled in the Senate.

Some of the details have started to bubble up to major media outlets and several of you have asked about it, so let’s have an update, shall we?

Even in a bitterly divided Congress it’s still possible to get something done. Or at least done halfway. The Secure Act passed 417-3 in the House and was apparently getting fast-tracked through the Senate and to President Trump’s desk for signature when it was held up by two senators. The issues causing delay, apparently, have to do with expansions to how 529 plan dollars could be used by parents to fund homeschool and religious schooling. These are political hot buttons for some and worthy of holding up otherwise popular legislation. Others have wondered why political issues with education savings accounts should impede legislation aimed at retirement accounts, but that’s Washington, right? 

Here’s a review of the “major” would-be changes –

The age for starting required minimum distributions (RMD) would be moved from 70.5 to 72. This would let retirement money accumulate a little more and adjusts for longer life expectancies since the 1960’s when the current law was written. 

IRA contributions would be allowed to continue past age 70.5 for the same reason. Folks are living longer, and many are still working well past 70. It doesn’t make sense to disincentivize continued retirement savings for those not yet retired.

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