| Home | About | Archives | RSS Feed |
@theMarket: Markets Sell in May
 |
The old adage "sell in May and go away" seems to be working this year. In short order all three averages experienced a down draft over the past few days that amounted to about a 5 percent decline in total. Is there more to go on the downside?
If I were a betting man, I would say the odds are in favor of more declines in the weeks ahead. I base that bet on the assumption that it will take at least until the end of June before we get anymore clarity on whether or not President Trump is willing and able to salvage a trade deal with China.
By now, most readers are aware that there has been an abrupt change in expectations on whether or not the tariff trade wars will end anytime soon. Both countries have escalated their rhetoric and at the same time made clear that more tariffs are in the works unless a resolution can be successfully negotiated.
There is a G-20 meeting coming up at the end of June. Reports are that President Trump and his Chinese counterpart, Xi Jinping, will meet at that time. Until then, investors can expect this war of words to continue. Traders will be cocked and ready to pull the trigger on every tweet, comment, or action by either side. I expect markets to respond (up or down) with a vengeance.
At the same time, expect to read and hear how tariffs are bad for worldwide economic growth. The bears will begin warning that Trump's actions towards China will cause the U.S. economy to tip into recession next year. I expect the inverted yield curve will be resurrected and demands that the Fed cut interest rates immediately will likely occupy much of the headlines. And there is some truth to that. As long as a global trade war is a possibility, corporate investment is not likely to rise, nor should it.
We have heard this all before and may hear again in the months ahead. The facts are that while some progress can and most likely will be made in forging a trade agreement with China, the real difficult issues, such as intellectual property safeguards, will take much longer than anyone expects.
One troubling aspect in the president's recent remarks is his willingness to keep tariffs in place, not only in China, but in his negotiations with other countries. We knew when he was elected that there would be a protectionist flavor to his economic policy, but as time goes by his stance has hardened.
The last time the United States actively used tariffs as an economic policy weapon was back in the Thirties. As readers may remember, those policies by us as well as our trading partners ushered in the Great Depression. Could it happen again?
Some argue that the world has changed, and circumstances are different. Protectionism, after years of giving away the shop in trade deals such as NAFTA, is just leveling the playing fields. That may be accurate, but it flies in the face of every economic principal I have studied. If that is truly the endgame here, let's hope it turns out better than the vaunted tax cut that was supposed to supercharge the economy and lead to massive investment in this country.
As the drama continues to play out on a daily basis, look for the markets to remain unsettled. While the ups and downs are nerve-wracking and unpleasant, it's part of a necessary and overdue reset in equity prices. I believe it is temporary and in time will lead to higher prices overall.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Epidemic Pulls Pork Prices Higher
 |
The African swine fever could cause prices in China to spike 70 percent or more this year. The highly infectious disease is spreading throughout Asia and could lead to a large increase in the price of pork here at home as well.
Before you ask, this highly infectious virus, while deadly to pigs, is not harmful to humans. The problem is that when even one pig is tested positive, the entire herd needs to be slaughtered as quickly as possible. There is no cure.
The government is taking this epidemic seriously, and well it should. Tough new government rules have been implemented this month in Chinese slaughterhouses and processing plants to identify and test for the virus.
The Chinese are the world's largest consumers of pork, accounting for 49 percent of all pork consumed. Domestic hog production, prior to the epidemic, was roughly 700 million pigs. To date, only about a million pigs have been infected, but those figures may be understated. A Shanghai-based consultant company, JCI, is forecasting that pork production will fall by almost 16 percent this year to 8.5 million metric tons. That would leave roughly a 7 million metric ton shortfall in supply.
The government's inspection efforts have slowed down business and reigned in demand, at least temporarily. But given the popularity of pork in China, most producers are believed to have large stockpiles of pork supplies, most of which are in cold storage. As such, Chinese producers are dipping into their cold storage supply to satisfy demand and keep prices somewhat reasonable, at least until the second half of the year.
Given the severity of the epidemic and the wrath of the government, if the present guidelines and restrictions are ignored, producers and distributors don't dare to buy fresh pigs, kill them, or sell the meat until the government gives them an all-clear. In the meantime, the epidemic has spread to Vietnam and Cambodia, which are also big pork consumers, as well as other nations in Asia.
In order to fill China's shortfalls in supply, pork producers in Europe and the U.S. are starting to increase shipments to China. That is despite the fact that U.S. pork exports are subject to a 62 percent tariff, thanks to the tariff war between the U.S. and China.
There are also other side effects to the pork crisis. Soybeans are the major source of pig feed. Less pigs means less demand for soybeans. That also hurts U.S. producers. China had already cut imports from American soybean farmers and the virus simply reduces demand for our exports even further.
Chinese consumers may also be forced to substitute beef and other proteins for pork. That could send prices of beef higher since China already represents 28 percent of the world's meat consumption.
While there have been no known cases of the African virus here, the U.S. is already taking precautions. The National Pork Producers Council recently canceled its 2019 World Pork Expo in Des Moines. Our government also announced increased safety measures to prevent the virus from entering our livestock supply. Most of their effort is focusing on what is called additional attention to "farm biosecurity."
About the only silver lining for America in this stormy situation is the present tariff war. As we plan to levy even higher tariffs on just about all Chinese imports, the risk of importing infected pigs has been dramatically reduced.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Tariffs Trash Stocks
 |
Volatility in the form of U.S. trade tariffs levied on China cut through investors' complacency with a vengeance this week. It took less than three days to drop the markets by 3 percent. Is it over or do we have another 5 percent or so to endure?
My bet is that it is over — for now. Sometime during the on-going trade negotiations occurring in Washington today and tomorrow, the thorny trade issues, (such as intellectual property (IP) protection for U.S. companies) will be kicked down the road. A compromise on other, easier issues will be announced as "on-going" (although not inked) and the Chinese delegation will fly home in an atmosphere of reconciliation.
From the president's perspective, China, after agreeing to a list of breakthroughs in the trade negotiations in Beijing two weeks ago, "broke the deal." Over a half-dozen important "firsts" involving IP rights, as well as other structural rules and regulations that have hampered U.S. companies doing business in China, were first agreed to as of two weeks ago. A week later, half of them had been deleted from the formal draft agreement sent to Treasury Secretary Steven Mnuchin and Chief Trade Negotiator Robert Lighthizer.
The move surprised the negotiators and infuriated the president. Sunday night, the president took to Twitter and threatened to raise U.S. tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. The tariffs took effect Friday morning. The Chinese have responded by preparing their own additional tariffs on U.S. goods.
As you might imagine, the Dow dropped 500 points or more on Monday, spiking higher on Tuesday, down again Thursday, and by Friday no one (including the Algos and their computers) was sure what to do next so the averages spent the day moving up and down just because. The volatility index, which is a measure of fear and loathing in the stock market, exploded higher, putting even more pressure on world markets.
The Chinese market, as well as other emerging market indices, cratered. One of China's main indices, the Shenzhen Index, dropped over 7 percent in one day. As the markets fell, the financial media trotted out all the "what if" scenarios they could cram into their studios between commercials. Hopefully, you turned it all off.
Why, therefore, am I not more concerned? Well, for one thing, all this brouhaha has only pushed markets down by 2-3 percent. In the grand scheme of things, that's simply one of three or four normal pullbacks you should expect each year in the stock market. And, on average, you can expect at least one 10 percent correction per year. You should remember that.
Granted, if things escalate from here on the trade front, we could see another 5 percent downdraft or so. But it still wouldn't be the end of the world, given the gains we have enjoyed so far this year. You might argue that I am too complacent, given the impact that higher tariffs could have on U.S. economic growth, let alone global growth.
If economic activity did decline, I would fully expect the Fed to come to the rescue, cutting interest rates in order to support the economy, while goosing the stock market once again. In fact, one could theorize that the president is thinking along these same lines when he said on Friday that "there was no hurry" in lifting these new tariffs.
I have been warning readers for weeks that all signs pointed to a market pullback. All that has happened is that we are now in one. In the short-term anything could happen. We could bounce from here, get back to the old highs and fail. Things might also quiet down on the trade front for a week or two, while investors' focus may switch to what's happening in Iran or North Korea. Those areas could also cause markets to fluctuate. Take it in stride.
My advice is to look beyond these events and keep focused on the fact that there is still a whole lot of good news supporting the markets just under the surface.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: What Does Your 401(k) Investments Look Like?
 |
It might surprise you to know that many retirement savers religiously contribute to their tax-deferred savings plans but have no idea what investments they own. Many plan representatives simply suggest that if you don't know, just invest in a target date retirement fund. Is this a good idea?
Most 401(k)s and 403(B)s plans, for example, have between 20 and 30 investment options you can choose from. This menu of choices normally includes bond and stock funds as well as international funds. There are also balanced or blended funds, which invest in a mixture of stocks and bonds. Many plans also have some kind of annuity-like investment as well as target date funds.
Supposedly, target date funds take the thinking out of investing. Let's say you plan to retire in 2040, so you select a target date fund that approximates that year. The rule of thumb states that the closer you get toward retirement, the more conservative one should be. That means you should have more bonds than stocks (according to Modern Portfolio Theory) in your investment portfolio as you age. Each year you draw closer to retirement, the computer model that actually manages these funds simply put more bonds in your portfolio and less stocks.
As a diligent saver who wants to make as much as one can before retirement, let's look at the track record of bonds versus stocks over the last ten years. In this case we have used Vanguard's intermediate term bond fund versus Vanguard's S& P 500 Index fund. But wait, you may say, the last ten years stocks have been up, up and away. So, let's make it 15 years, which includes the worst stock market plunge since the Great Depression. Bonds would have delivered a measly 4.88 percent versus 8.76 percent for stocks. That's almost a double. Over 10 years, stocks gained almost 15 percent.
Let there be no mistake, stocks do hold more risk than bonds. Case in point, in 2008, stocks lost over 35 percent, while bonds delivered investors nearly 5 percent. Fear and greed are motivational issues that govern everything we do in the financial markets. But, let's take a look at bond vs stock returns over the past 10 years.
| 10 Year Returns of $10,000 | ||
|---|---|---|
| Rate of Return | Ending Value | % Gain |
| 4.88% | $16,103.00 | 61.03% |
| 8.76% | $23,157.52 | 131.58% |
Those investors who were able to stomach the declines during the Great Recession were rewarded handsomely over those investors who fled to "safer" bonds. You need to decide the returns that your retirement account requires to reach your goals. Likely, that will mean adding stocks to the portfolio.
Back to the target date funds, a look under the hood reveals that you may own more bonds than you thought.
| JPMorgan SmartRetirement® | ||
|---|---|---|
| Year | Stocks percent | Bonds percent |
| 2020 | 37 percent | 63 percent |
| 2030 | 61 percent | 39 percent |
| 2040 |
76 percent
|
24 percent
|
| 2050 |
83 percent
|
17 percent |
| 2060 | 80 percent | 20 percent |
More bonds will make your retirement account less volatile, thereby giving you a smoother ride towards retirement. The price of that smooth ride will be the length of time it takes before you can comfortably retire. In the case of investing in target date funds, it may mean adding a few more years of working before you get to your destination. Are you OK with that?
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: New Highs Beget New Highs
 |
Some people believe we are in a "melt-up." It is where the simple weight of money pouring into the U.S. stock market continues to carry stocks ever higher. Whether that qualifies as an investment thesis, or simply a lame excuse to justify record highs, it matters little to the bulls.
It is true that this past week, we actually witnessed a rare event — a two-day, 50-point drop in the S&P 500 Index — before stocks recovered. But good news on Friday morning (job gains in the economy came in at 236,000) cheered investors. It was largely a goldilocks report where wage gains (considered inflationary) were flat for the month, bringing the the average hourly earnings rate up to 3.2 percent year-over-year.
Overall, the official U.S. unemployment rate is now 3.6 percent, which is the lowest level since 1969. It brings the total number of monthly job gains to 103 in a row, which has never happened before. Given that it is also the best start in the year for stocks since 1987, is there any wonder that exuberance is the prevailing mood on Wall Street (and in the White House)?
Even the bears, whose numbers are expanding by the way, admit that if we did suffer a correction, it would be, at most, shallow and sharp. That's the kind of correction you want, if and when it occurs. I have been reporting faithfully each week the bullish rise in investor sentiment and, although it remains flattish at 55.7 percent bulls, it is still quite high.
Earnings season, which is 80 percent complete, turned out to be better than expected in the minds of most investors. And although the Fed did not cut interest rates this week at their FOMC meeting, I have to wonder if anyone really expected that to occur?
As we move into spring, it appears that the wall of worry we have been climbing is crumbling. We should finally receive a verdict on the U.S./China trade agreement as soon as next week, according to administration officials. Talks in China last week went well, and the Chinese delegation will be back in Washington this coming week to hammer out more details.
Some argue that a successful conclusion to this issue, which has been over-hanging the markets for almost two years, is largely discounted. Could we get a "sell on the news" reaction if a deal is announced?
We could, but I think it would depend on the level of the markets at the time. If, for example, the S&P 500 Index were to be trading above 3,000 or so, (another 70 points higher from here), then yes, it could be an excuse for some profit-taking.
And while everything seems rosy for the economy overall, we don't want it to get too much stronger in the short term. Remember, the Fed is data dependent. If, for example, the central bank did cut rates by a percentage point, as the president asks, in order to goose the economy, you can bet the next move by the Fed would be to reverse that and hike rates.
I believe the Fed's about face in interest rate policy last December is the real reason the market is where it is. If investors believed that the Fed's easy money policy might change, the markets would plummet. The Chinese economy might also be a factor.
In case you haven't realized this yet, China, as the world's second largest economy, has a substantial impact on overall global growth, including growth and inflation within the United States. Recently Chinese authorities have relied on fiscal spending to support their slowing economy, which has been hurt by the tariff issues.
A trade deal would be as good for China as it would be for the U.S. It could boost growth in both economies. But what's good for economies is not always good for stock markets. Rapid growth, on top of moderate growth, might ignite inflation.
In the past, Chinese demand for raw materials to fuel their growing economy has sparked inflation globally. If that were to happen again, it could force the Fed to reverse policy, raise rates, and cause a repeat of last year's sell-off. While this scenario is only one among several possibilities, it is something to keep in mind, given that we are within a week or two of a potential compromise solution in the trade talks.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
