Market analysts love their metaphors because they help put very complicated issues into a clearer context. Liz Ann Sonders, Schwab’s chief market strategist, is no different. In her recent piece she and her team even quote from Louisa May Alcott’s Little Women, “I’m not afraid of storms, for I’m learning how to sail my ship”, to set the stage for their outlook: pleasant skies overhead with storm clouds on the horizon.
Being a bit of an armchair sailor myself, these “looming storm” metaphors resonate with me. Like we’ve discussed previously, there are a growing number of indicators signaling a coming recession, but if you look around today you probably won’t see them. As the article below indicates, consumers are still out there buying. Wages have been rising so much of this buying has been with cash versus credit. More workers are feeling comfortable enough to consider quitting their job for a better one. Businesses are reporting solid profits. Interest rates are at record lows. In general, the list of positives is long.
But the negatives, or the storm clouds on the horizon, are building. Eventually, also as the article indicates, we’ll be in a recession anyway because it’s simply part of the economic cycle. When will it happen and how bad will it be? Will it sink your ship or merely help you be a better sailor? Time will tell. In the meantime, check out the following excerpts for Liz Ann’s take on our position (emphasis mine).
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.
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.
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?
These are interesting times. Briefly this morning the yield on 30-year Treasury bonds was below the dividend yield of the S&P 500 as investors continued to plow money into bonds. This is a backwards situation that doesn’t occur very often. It’s right in there with the weirdness of the inverted yield curve we’ve discussed many times before. But as more of you ask about the yield curve and what it tells us about the likelihood of recession, I thought it would be good to hear from someone else on the topic.
There are few analysts that I always try to make time for, and Dr. David Kelly at JPMorgan is one of them. I’ve slimmed down his recent writeup discussing the yield curve, what it is and how it works, for your reading pleasure. One interesting tidbit is that he doesn’t think there’s a high probability of a recession starting within the next year, but he doesn’t speculate beyond that. Personally, I think it’s more likely outside of a year, but who knows. It certainly doesn’t feel like a recession is imminent, but the warning signs are there.
An important takeaway from the piece below is that inverted yield curves don’t cause recession, they’re simply an indicator. Read on and, as always, let me know of any questions (emphasis mine) …
In days of yore, the sight of seagulls wheeling over an inland forest or fields was taken as a sure sign of a storm at sea. Looking at it from the seagull’s perspective, there are no fish in forests or fields – so the only reason to be inland is to avoid something dangerous out at sea. In a similar vein, last week, many investors took the sight of an inverted yield curve as a sign of impending recession.
However, to understand what the yield curve is really telling us, there are at least five key points that investors should recognize, namely:
Why an inverted yield curve has predicted recession in the past,
Why it may not be such a good predictor right now,
How other factors are pointing to slower economic growth,
How an inverted yield curve doesn’t actually hurt the economy, and
How low long-term interest rates, while not boosting the economy, are supporting the stock market.
On the first point, the reason a negatively-sloped yield curve has been a good predictor of recession in the past is because it tells us something ominous about what investors expect from the Federal Reserve.
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.
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.