April 24, 2019
Dear Clients and Friends:
It is truly a pleasure to serve you. In this letter, we want to update you with what has happened recently in the broader markets and provide you with some insight about where the economy is headed as well as information on changes we have made to client portfolios.
Recent Market Activity
As 2018 closed, investors were walloped with a decisive dip in overall stock values. The S&P 500 decreased 13.52% for the quarter, and international stocks experienced similar results. We expressed to you that we believed “equities were oversold at the end of 2018.” As it turns out, our sentiment was an understatement.
In the first quarter of 2019, the S&P 500 was up 13.65%, a decisive rebound, and it has continued to rise. It was the best quarter for the S&P 500 since 2009. Small U.S. company stocks and international stocks fared similarly.
The positive quarter was fueled by many factors including the following:
- The U.S. Federal Reserve Bank, and other central banks around the globe, backed off their monetary tightening and interest rate increases.
- A general attitude by investors that the fourth quarter sell-off was overdone, and it was a buying opportunity.
- China and the U.S. postured less and talked more.
- Most U.S. corporate earnings reports surprised to the upside.
- The U.S. labor market remained strong
- Gridlock in Washington, caused by a President of one party and one house of Congress in another party, decreased the chances of any major legislative initiatives which always calms markets.
We are happy that the markets have completely rebounded from the fourth quarter and for what it has done for the health of our clients’ portfolios.
Is a Recession Looming?
Of course, the most appropriate answer is that no one can answer this question with certainty, but we hope the information below provides you with some helpful perspective.
Analysts and short-term traders have become hypersensitive to any signs of a looming recession. Moreover, the public has taken notice. A quick review of Google Trends bears this out. Google searches for the word “recession” have jumped 61% over the last six months versus the prior five years.
The double-digit stock market decreases late last year, the recent slowdown in U.S. economic growth, and an inverted yield curve have all contributed to worries about a recession. The economic expansion is fast approaching its ten-year anniversary. If the economy is still expanding in July, the current expansion will be the longest on record, exceeding the expansion of the 1990s, which lasted exactly 10 years.
We care about recessions for a host of reasons. For most Americans, job insecurity increases, layoffs rise, and it becomes much more difficult to find work. For investors, it’s a time of heavy uncertainty. Bear markets–a 20% or greater decline in the S&P 500 Index–are typically tied to recessions, as corporate profits decline, and companies warn about the future.
What Do Leading Economic Indicators Tell Us?
Economists have always had trouble forecasting recessions. We tend to focus a good deal on the economic indicators that presage more difficulty in the future. The Conference Board compiles what is called the Leading Economic Index®, or LEI. It has historically been used to warn of an impending recession.
According to the Conference Board, the LEI has essentially been flat since October. It has correctly signaled a slowdown in the economy, but it has not signaled a recession. In fact, a March report by the Conference Board entitled, “Fading Domestic Headwinds Will Keep Growth Above Trend,” is cautiously encouraging.
The Fed Has Shifted from Rate Hikes to “Hold Tight”
During the third quarter of 2018, the economy was doing very well. At the September meeting of the Federal Reserve, policymakers were projecting three 0.25% rate increases in 2019.
The Fed cut its forecast to two rate increases at the December meeting amid stock market uncertainty and signs U.S. growth was moderating. At the conclusion of the March meeting, the Fed said it sees no rate hikes this year.
Fed Chief Jerome Powell spoke decisively against any talk of potential rate cuts, arguing at his press conference that he expects “the economy will grow at a solid pace in 2019.”
Yield Curve Worries
What is the yield curve, and why is it a concern for the markets? The yield curve is a comparison between the yields on short-term bonds compared to long-term bonds. The normal shape of the curve between short-term and long-term is upward-sloping. Yields generally increase as maturities get longer. The slope is “inverted” when long-term yields fall below short-term yields. If the curve is inverted, it is said to reflect expectations that the economy is weakening. The yield curve is leading indicator number four of the LEI.
- On March 22, the yield on the three-month T-bill exceeded that on the 10-year Treasury by 0.02 percentage points (U.S. Treasury Dept). That hasn’t happened since 2006. However, the magnitude is extremely small, and it is also important to note that the curve is still positive for longer term bonds. Another strong recession predictor is an inversion of the 10-year/2-year Treasury. That has not occurred, as the 2-year yield has been falling along with the 10-year.
Hence, there is significant ambiguity about this signal. Nonetheless, even without a recession, we need to be mindful that at times the stock market becomes “unhinged” from the economy and can move in an opposite direction, as so dramatically happened last December. The important lesson is to be prepared, both emotionally as well as in your investment strategy and asset allocation for these inevitable periods of dislocation.
In the fourth quarter, for accounts where it was appropriate and added value, we did some tax loss harvesting. This means we sold some positions we might otherwise keep so that we could capture a capital loss that would provide some benefit on 2018 tax returns. When possible and appropriate, we reverse those trades after the IRS wash sale rule’s 30-day time period expires.
In addition, although we consistently review all holdings in client portfolios, we performed a more comprehensive review of the alternative funds. We made a variety of changes that essentially removed a few funds that are considered “tactical” or “global macro” in their investment approach, and replaced them with a broader array of funds with various strategies. These include:
|Nuveen Equity Market Neutral||Using long and short positions in U.S. large cap stocks seeking capital appreciation independent of the direction of the U.S. equity market.|
|AQR Alternative Risk Premia||A global fund that uses long and short positions seeking capital appreciation independent of the direction of the global equity markets.|
|RiverNorth Doubleline Strategic Income Fund||This fund seeks income from a variety of sources and is tactical in its approach.|
|WCM Alternatives: Event Driven Fund||This fund employs an event-driven strategy in that it invests in stocks involved in mergers, litigation, spin-offs and other corporate reorganizations.|
|Equinox Mutual Hedge Futures Strategy||This fund seeks to achieve capital appreciation in bull and bear equity by investing in managed futures.|
|JP Morgan Global Allocation Fund||A fund with a tactical approach that can invest in a broad array of strategies globally and domestically.|
|SPDR Gold Share||An exchange traded fund that looks to reflect the price of gold bullion.|
In the coming quarter, we have one structured note that will mature, and the investment committee is researching appropriate options for where to invest the proceeds. We continue to monitor and review your holdings on a regular basis and will communicate any appropriate changes.
We greatly appreciate your continued confidence in Compass Ion Advisors.
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable. This presentation may not be construed as investment advice and does not give investment recommendations.
The securities presented may not be representative of the current or future investments for Compass Ion clients.
You should not assume that investments in the securities identified in this presentation or that recommendations made in the future were or will be profitable or will equal the performance of securities identified in this presentation.
Additional information, including advisory fees and expenses, is provided on Compass Ion’s Form ADV Part 2. As with any investment strategy, there is potential for profit as well as the possibility of loss. Compass Ion does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. The investment return and principal value of an investment will fluctuate so that an investor’s portfolio may be worth more or less than its original cost at any given time. The underlying holdings of any presented portfolio are not federally or FDIC-insured and are not deposits or obligations of, or guaranteed by, any financial institution. Past performance is not a guarantee of future results.
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