Large cap U.S. equities continued to roll higher in September as both the Dow Industrials and S&P 500 hit new all-time highs. Smaller stocks, represented by the S&P 600 and S&P 400 respectively, posted losses for the month. Global equities were modestly higher. Our bond index reversed the August gains as commodities and the US Dollar strengthened.
U.S. & International Stock Index Returns
|Index September 2018 Year-to-Date|
|Dow Industrials 2.00% 7.04%|
|S&P 500 0.47% 8.99%|
|S&P 400 (Midcap) (1.32%) 6.26%|
|S&P 600 (Small Cap) (3.89%) 13.42%|
|MSCI World 0.50% 3.53%|
|MSCI EAFE 0.81% (3.76%)|
|Bloomberg Agg. Bond (1.60%)|
|CRB Commodity Index 0.67%|
|US Dollar Index 3.24%|
All data as of 9/30/2018, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Not much to say here other than the second longest bull market continues to move ahead. September, historically a bad month for equities, was positive for the large cap indices we follow. The S&P 400 and S&P 600 were both down for the month, but the move lower looks more like a natural pause than a change in investor sentiment.
The 10-year Treasury yield ripped higher this month, peaking at just below the May highs on September 25. Yields finished the month at 3.056% and at the top of the 2018 range. Hard to conclude if the trading range will continue or if a new trend higher is just beginning. A strong move above the 3.07% May highs would lead us to conclude that the market bottoming process that began in 2012 is over and the new bull market for bond yields has begun.
In our August Report we presented a big picture perspective on the US Dollar Index and laid out a case for the possibility of a big breakdown in dollar strength. Such a move would be beneficial to both consumers and investors in the United States, as well as emerging market countries who have outstanding debt denominated in dollars. The thing about technical analysis is that when you recognize a pattern it is not a sure thing that what you believe will happen actually happens. There are no guarantees.
During the past month it looks like the chart pattern we saw was starting to come to fruition … until maybe not. The final two days of September saw a dollar rally back from a potential breakdown. So here we are, once again, at the end of September with the US Dollar Index right around the 95 level and no clear resolution to the question of the next move for the dollar.
Just when we though commodities might be heading lower for real, September showed some strength and the very real possibility of a return to the bull market trend that began in 2017. In September the CRB Index had higher highs and higher lows on the chart, finishing the month at 195 and right at the 200 day moving average. A strong move higher would indicate a new trend and a move back up to the May highs. On the other hand, if the index stalls here and moves lower we will expect to see an extended breakdown in the index. Given the strong global economy and the unease surrounding the oil markets we suspect that the CRB Index will be higher at the end of October than it started the month.
“Yeah hey, they say two thousand zero zero party over, oops, out of time
So tonight I’m gonna party like it’s nineteen ninety-nine” – Prince from the song 1999
History doesn’t repeat itself but it often rhymes.” – Mark Twain
The definition of a hard market is much different for an investment advisor than it is for the average client. For the client the hard market is the one that is going down and for the advisor it is the market that acts irrationally. At times there is overlap when everyone is happy or everyone’s frustrated, usually when stocks have been moving higher (or lower) for some time. Where there’s almost always a disconnect is during the final run higher in a bull market or the bottoming process of a bear market.
Talking with one of our industry contacts a few weeks ago the topic of where one should be invested came up. After a few minutes of conversation, dissenting opinions, and a smattering of disbelief, the conclusion we came up with was that how one would want to be invested for gains RIGHT NOW is much different than what we would recommend for a forward-looking asset allocation. Because right now what is working is the U.S. stock market; more specifically, what is, and has been working for some time, is U.S. growth stocks. Almost every other asset class one would add into an asset allocated portfolio has drastically underperformed the U.S. equity market indexes.
Back in the Lake Wobegone days of the late 1990s when the Nasdaq and S&P500 seemingly hit new highs every day investors couldn’t have been happier. How happy? We remember watching the morning shows on CNBC back then and the hosts were literally giggling because of how high the company stock in their 401k’s was at the time. We also remember all the new technology and aggressive growth mutual funds that were coming to market on a very regular basis. How crazy was it back then?
According to TheStreet.com the Munder Net Net Fund in January 1999 had $1 billion in assets, attracted $3.7 billion of inflows during the year, ended the year as a $7.4 billion fund, then closed to new investors on April 17, 2001. Because there was so much demand for all things technology at the time, in October 1999 Munder opened the Future Technology Fund. At the time none of this was unusual and, in fact, very common. It was mania on steroids.
As the money was flowing into aggressive funds there were many funds (and investment styles) that were forgotten about at the time. Not only were some of our favorite balance funds losing assets but Warren Buffett was thought to have lost his ability to pick stocks. Almost nobody felt the need to own anything that didn’t trade on one of the U.S. exchanges. It was a crazy time to be an investor.
Clearly the markets are not where they were back in 1999, yet, as the Mark Twain quote above notes, history often rhymes. For a few years now asset allocation “hasn’t worked” when viewed against the backdrop of the S&P 500 or NASDAQ market indices; Companies are bringing themselves public with negative cash flow in record numbers; the “Buffett Indicator” (total market cap to GDP), which peaked at 145% in 2000 and 110% in 2007, sits at 149% today.
And things are arguably very, very good in the United States as well as our equity markets. If you look at the charts at the top of this piece it is clear that the stock market is on an upward trajectory. The economy is good. People are working. From all indications it is full steam ahead. Markets are fully valued, maybe even a bit overpriced, but things are as good as it gets. It is really hard to make the argument for diversification when things are this good.
Yet that is the exact reason why one should own a variety of asset classes. The dominance of U.S. equities can continue to go on for some time. Former Fed Chairman Alan Greenspan talked about the “irrational exuberance” of markets 3 ½ years before the March 2000 market peak. But when the boom went bust the investor who made steady gains during the boom times was able to come out of the bust relatively intact as the areas of the market discarded by many investors (back then it was value stocks, bonds and small caps) were undervalued and performed well during the 40%+ move down in the 2000-2002 bear market.
We study history in high school because the past causes the present which causes the future. We can learn from the mistakes of the past. What we know from past market cycles is that things are good until they are not. Markets are emotional, thus they bottom on fear and peak on greed, not rational market valuations.
We tell you this as a fair warning: The good times can go for a long time but at some point have to come to an end. When that happens is anybody’s guess.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to consider our report. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
An index is unmanaged and not available for direct investment. Index returns do not reflect the deduction of fees, expenses or taxes. Returns are U.S. dollar based unless indicated otherwise.
Past performance does not guarantee future results and there is no guarantee that any forward looking statements made in this communication will be attained. The indices presented in this communication are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com