Weekly eLetter 3/8/ 2019 – Much Ado About…What, Precisely?

Last week in the Market Minute section of our eLetter we passed along our observation that Mr. Market sometimes reacts to things in unusual ways…including occasionally not reacting at all when there are things in the news that one would expect to have elicited a response. Well, all modesty aside, today we are wondering if Mr. Market might have read our communication. To wit: yesterday we saw a bit of a selloff which now, as of this writing on Friday morning, seems to be bringing the indexes even lower. This, in apparent response to three main bits of news. Let’s take a quick look at them.

European Central Bank

The ECB can be thought of as the European equivalent of our Fed, inasmuch as they are the entity for framing the environment for interest rates. This week ECB Head Honcho, Mario Draghi, had a rethink on the direction and timing of rate changes. After reviewing their projections of GDP growth for the Eurozone region they decided to delay any rate increases by at least one calendar quarter. The GDP outlook estimates were significantly reduced – from 1.7% to 1.1%. Not good, especially considering that even the 1.7 number was a bit anemic. Why so glum? Good question, especially since one need not look too far for some happy numbers. Frinstance, the German unemployment rate set a new low in January. It’s at 3.2%. Seems to us that a lot of the pessimism is rooted in thoughts of what might happen rather than things as they are. We’re looking at you Brexit and you too, US tariffs. Since nobody actually likes the tariffs, our bet is that we won’t end up seeing much of them and for the question of ‘What are we having for Brexit?’ a number of economists have produced reports saying that after much dust has settled, it may not make a lot of difference either way. So, in the meantime, why shouldn’t the Eurozone business community be happy about the lower cost of money? Watch this space. 

Trade Deficit

The headlines screamed ‘Worst Trade Deficit in Ten Years!’ Subhead (not printed): ‘Trump’s Trade Deficit Plan a Failure!) OK. It’s true that President Trump hates trade deficits. Being a businessman, he thinks (perhaps, to some degree, rightly) that if you buy a bunch of stuff from somebody, they sort of have an obligation to buy an equal amount of stuff from you – both of you benefiting equally from the arrangement. But let’s zoom out to the 30,000-foot view for a sec.

Trade deficits also occur if one country’s economy is much stronger than another country’s. In such a case the imbalance of the collective purchasing power of one country compared to another is the very thing that allows for the creation of deficits. Therefore, it would not be wrong to say that, given a choice, one would prefer to be on the deficit side of the equation. To have the opposite view you would have to think that it would be a good thing if the consumers on the other side of the deal had more purchasing power than you do – a proposition you might not want. Economist Milton Friedman explains it this way:

“When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance, when you have to send out more goods to get fewer coming in. It’s favorable when you can get more by sending out less.”

Jobs Data

Wow! It was just a month ago that the non-farm payrolls report came in at 311,000 — more than 100,000 OVER the forecast estimate. In an unbelievable (literally) turnabout, today’s number says that the total of jobs added last month was a paltry 20K. How, you may ask, did THAT happen? Our guess is…it didn’t.

Many of the reports from the Bureau of Labor Statistics (BLS) were either late or incomplete last month due to the government ‘shutdown’. We think the NFP report has goofy numbers and will see a correction in the next report (maybe even sooner). Meanwhile, writing in the Wall Street Journal, James Freeman reports:

“The great American jobs machine is still roaring. Slowing global growth and trade friction may cloud the economic horizon, but U.S. small businesses in February went on an historic hiring binge. That’s according to the latest employment report from the National Federation of Independent Business, due out later today.

NFIB has been conducting this monthly survey for decades. The organization’s chief economist William Dunkelberg reports that they’ve never seen results like these:

‘Job creation broke the 45-year record in February with a net addition of 0.52 workers per firm (including those making no change in employment), up from 0.25 in December and 0.33 in January. The previous record was 0.51 reached in May 1998.

NFIB also found a historic low in the percentage of business owners reducing employment—just 3% of survey respondents. “Owners are trying to hold on to the employees they have,” says Mr. Dunkelberg.”

Freeman goes on to say:

“Readers can be forgiven for thinking that the economy is headed back down to the slow-growth new normal of the past decade. That’s certainly the consensus in the media industry. But across all industries, the owners of small firms don’t seem to share that view. After the February hiring spree, the survey finds plans for future job creation remain robust and the main obstacle is not lack of business opportunities, but a lack of workers to take advantage of them.”

So, if the 20K number is correct, I suppose one explanation could be that everyone who wants a job already has one and there just isn’t anyone left to hire. </sarc>

Market Minute — Perspective Again: 10 Years Ago

This week marks the 10-year anniversary of the bottom of the Global Financial Crisis – from a market view. At that time in 2009 the S&P Index* hit the lowest close of the crisis period – 676.53 on March 6. From the pre-crisis top of 1565.15 the S&P Index declined nearly 57%, clearly laying waste to the savings of millions of households in the process. This also gave us the highest levels of domestic unemployment in 30 years.

We know of many ‘investors’ who threw in the towel sometime during the crisis and some became so fearful that they never reentered the market – ultimately to their detriment. With the perspective of hindsight, it’s easy to see that was a time to be a buyer, not a seller. However, back then there was an extremely real fear among many people that the sky was indeed falling. 

You may not have an appreciation for the pervasive dread that existed from Main Street to Wall Street and the speculation that the global economy could collapse. Seeing the NY Times headline that read ‘663,000 Jobs Lost in One-month, Total Tops 5 Million’ was scary. There were a number of ‘impossible’ events that occurred. And then, at the bottom, even as the recovery of the US Markets was underway, there were still plenty of reasons to be skeptical that the worst may not have been over. The mainstream media showed us plenty of reasons to run and hide.

To say it was difficult to fight the established view that one should ‘always’ hang on to your stocks is an incredible understatement. However, once the bottom was reached and markets began to recover, it was equally hard to have the intestinal fortitude to crank the thermostat to the right and focus on adding back the equities that had been removed. There will always be points where any indicator will tell us to raise cash too early or get back into the market a little bit too late.

We consistently look for ways to improve the tools we use, and we know that no single indicator is perfect (and it should raise red flags if anyone says they have one!). If someone actually had a system to perfectly identify the market tops and bottoms, do you think they would tell the world?

Today our indicators are mostly green. Our core US stocks read in the 86% level vs. other assets, which means that not many of the invest-able assets appear to be stronger than US equities right now. Also, cash rankings are currently at 14% – that’s fairly close to the bottom. It is also a strong indicator that the great majority of assets are expected to out-perform cash over an intermediate and longer term.

As I’ve said here before, it’s a bit concerning that as money managers add back their stocks, they seem to have an abundance of defensive assets (like utilities and real estate). So, while one can never be certain that market skies will always be blue, we can be reasonably comfortable that this is a time to be invested. We have taken advantage of the current pullback to add in equities. It is our expectation that several months from now we will look more like heroes than goats.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.