Quarterly Comments: February 2020

“Still Lower for Still Longer” seems to sum up where we are for interest rates, inflation, many sectors of the economy as well as many financial assets – all except the US stock market. The US stock market seems to be able to shake off the many headwinds of slowing Global growth which has been exacerbated by the coronavirus hit to global trade, persistent weak US manufacturing data, and let’s not forget continued uncertainty surrounding politics.

While January was a down month, when we take a step back to view a 12-month recap chart of the S&P 500 it shows a very steep slope up. What can explain these conflicting pictures?

We believe several factors are at work here:

1. The US Consumer, who provides 70% of GDP growth, is feeling good. With the lowest unemployment in over 50 years, consumers are confident, feeling their jobs are safe and maybe seeing a slight increase in their wages.

2. TINA – aka There is No Other. With bank interest rates so low, Treasury Notes and Bonds little better, the average investor is seeking a higher yield and is willing to take some risk to get it. Many dividend paying stocks offer higher or equal dividend rates while also holding out the possibility of an increase in share value.

3. Uncertainty has diminished from the much higher levels seen when the trade dispute with China threatened to expand to unsupportable levels. The current Phase One agreement, while not rolling back any of the existing tariffs, offered at least temporary relief from the specter of tariff escalation.

4.Despite a slowing earnings growth, and the likelihood of further warnings from companies which are effected by the supply chain virtual shut off from China, the US economy is forecast to continue on a 2%-ish growth in 2020. This is what we’ve experienced over the last ten years, and the stock market seems to be willing to accept higher valuations in less than perfect conditions. Very low interest rates help this acceptance of higher than average P/E’s – or what we are willing to pay for a dollar of future earnings of the stock.

So, what could wrong here? I see only one glaring possibility – the slowdown in worldwide shipping of component parts for everything from cellphones to automobiles gets much worse. When trade is sharply curtailed, for whatever reason, money doesn’t flow, employment is effected, and not in a good way. We saw this in the extreme in the banking crisis of 2008.

In a broader look into 2020 we see our economy, and our stock and bond markets, as moderately positive. We see no imminent risk of recession, but we are watching the yield curve, which has been a fairly reliable indicator of near term recession in the past. It currently remains moderately positive.

Our ESG focus has provided us with another means of adding value through risk mitigation. Recent discussions on Bloomberg Surveillance suggest, and confirm our belief, that including Environmental, Social and Governance analysis in our portfolio construction process reduces the overall risk within the portfolio while maintaining and many times exceeding our overall total return expectations. Finally! – doing good is being financially rewarded.


The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.

The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value