Welcome to the June newsletter! Today, we’ll update you on the potential indicators for a bear market, blockchain confidence, recommended actions for your stock and bond portfolios, and more. Let’s get started!
Summary
The stock market’s December correction is over as we have hit a new all-time closing high on April 30. Now we have had a small pullback in the market, and we believe this represents a buying opportunity for those with cash-on-hand who want to add to their stock market allocation. Key economic indicators show low inflation, moderate economic growth, low interest rates, and very low unemployment.
Employees should continue to make their weekly or monthly contributions to their employer’s retirement plan or IRAs. The economy continues to grow steadily without run-away inflation. No recession is in sight, and all portfolios remain fully invested. After this buying opportunity, additional money can be added to the stock market at any time on a dollar-cost-average basis.
The Economy
Employment
U.S. nonfarm payrolls rose to a very good level of 263,000 in April. The March payroll number of 196,000 was revised down slightly to 189,000, and the February number of 33,000 was revised up to 56,000. The three-month payroll average dropped from 180,000 to 169,000.
Unemployment dropped to 3.6%—the lowest since December 1969. Total unemployed persons fell below 6 million to 5.8 million. In April 2018, there were 6.3 million total unemployed persons. In April 2019, the increase in “average hourly earnings” remained constant at 3.2% year over year.
Gross Domestic Product
The U.S. economy grew at a revised annual rate of 3.1% in the first quarter despite headwinds of a partial federal government shutdown and a variety of trade issues, suggesting the current expansion has room to run as it enters its 10th year.
Stock Market
Commentary
The S&P 500 Index closed on May 29, 2019 at 2783. We regard this as a buying opportunity for those investors with cash and a desire to add to their stock market allocation.
We encourage our clients to be long-term investors by demonstrating courage when markets are low and displaying patience for the future when markets are high. We suggest our investors ignore (the best they can) the aggressive extremes that sometimes occur in the stock market.
Will the following two leading indicators predict the next bear market?
1. The U.S. Treasury Yield Curve as of May 29 is below.
There is a noticeable dip in the yield curve at 2yr, 3yr, 5yr, and 7yr. Those yields are below the yields at 1mo, 2mo, 3mo, 6mo, and 1 yr. What is nice is the steep upward trend at 10 yr, 20 yr, and 30 yr.
2. The Conference Board said the Leading Economic Index (LEI) picked up 0.2% in April.
This follows a 0.3% increase in March and a 0.2% increase in February. The LEI spokesperson said, “The U.S. LEI rose in April, the third consecutive increase, with a majority of the indicator components making positive contributions. The Conference Board expects the U.S. growth to moderate towards 2% real growth by year’s end.”
Neither the Treasury yield curve nor the LEI suggests the beginning of a near-term (6- to 9-month) recession.
Stock Market Valuation
We continue to estimate 2019 S&P 500 operating earnings will approach $167 or higher. Our estimated price/earnings ratio range remains at 17 to 18 times operating earnings due to our environment of low inflation and low interest rates. Therefore, the higher end for the S&P 500 Index this year should be 3006 = 167 x 18.
Recommended Action for Your Stock Portfolio
We regard the current stock market as attractive for purchase for those investors with cash and a desire to add to their stock market allocation. We regard the risk of a recession as low at this time. Our two key pre-recession indicators continue to suggest the economy will continue on a slower, but positive, growth tract in 2019. Therefore, we recommend investor’s stock market allocation should be fully invested in a low-cost, highly diversified, and tax-efficient portfolio.
Confidence in the blockchain continues to grow.
Two large European cargo ship operators have joined a blockchain platform previously formed by Maersk and IBM. This is a significant boost to the blockchain technology.
The addition of France’s CMA CGM and the Switzerland-based Mediterranean Shipping to the TradeLens platform means these three carriers—who control nearly half of all international seaborne containerized cargo—will make the movement of their freight more transparent and increase the potential for savings.
Maersk said approximately one-fifth of the total cost to move freight internationally is the cost of the paperwork and the blockchain will reduce that cost. Over 100 seaports are now testing blockchain technology.
As a reminder, a blockchain is an open, distributed digital ledger that can record transactions between two parties efficiently and in a verifiable, permanent way.
Bond Market
Commentary
When current bond yields are low (as they are now), existing bond prices are high. Bond yields and bond prices always move in opposite directions. Therefore, we do not recommend buying bonds or bond funds at this time due to their high prices. We believe a bond-buying opportunity will make itself available later this year as the stock market improves and bond yields increase.
Federal Reserve
An update will be made next month on the Federal Reserve.
U.S. Treasuries
An update will be made next month on the U.S. Treasuries.
Recommended Action for Your Bond Portfolio
Our bond market recommendations have not changed since last month. We are investing only in the following types of bond mutual funds or bond ETFs:
- Short-term, investment-grade U.S. bond funds
- Intermediate-term, investment-grade U.S. bond funds
- Short-term, high-yield U.S. bond funds
- High-quality U.S. money market funds
- Conservatively allocated U.S. balanced funds (30% to 50% in stocks, the rest in bonds)
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.