Jeff’s Weekly Stock Market Commentary: Globally Growth Has Been Decreasing
The Federal Reserve decided to not raise rates at their meeting last Thursday. For most in the Wall Street System and media, it came as a shock! Not to me.
Over the last weeks and months I have explained that growth globally has been decreasing. There is a cause and effect relationship between what happens in an economy generally and what goes on in that country’s stock market. For example, growth slowing in China is the cause of the nervousness in its stock market. The effect has been unprecedented market volatility in the Hang Seng index and aggressive government manipulation attempting to arrest its decline.
The same thing is happening in Europe. They have been struggling to generate growth and inflation the last several years. Germany had been the one bright spot as its economy continued to power ahead. Not any longer.
The lack of growth and inflation in Germany has caused investors to question the future profitability of stocks. The result is that investors have been selling stocks and moving to bonds or cash, having the effect of a sharply declining stock market. The same is happening in Spain and several other countries in Asia.
For instance, the German stock market (the DAX) is now in CRASH MODE down -21%, and it isn’t alone. Spain is also down -21%. The Canadian stock market (TSX) has been down almost 19% before its recent recovery.
Now, the economic numbers are consistently showing that US growth is also slowing.
This shouldn’t be a surprise to those who track and monitor growth statistics and trends. Unfortunately, is appears that few in the Wall Street System do. Nor do the news outlets spend much time explaining what has really been going on in the economy. For instance, a few months ago US growth from 2012 forward was revised down to 2% annually. The evening news shows trumpeted the second quarter GDP number when it was revised up to 3.7%! Wow, our economy must be doing fantastic! What they haven’t told you, though, is that the most accurate Federal Reserve forecast tool is estimating that 3rd quarter GDP will only be 1.5%.
Maybe that is why so many of the Federal Reserve Governors that were so vocal about raising interest rates suddenly changed their minds!
Here’s the thing: our economy isn’t going to suddenly shift into a higher gear in time for them to raise rates in October, nor December. I have been saying that it is likely there won’t be an interest rate increase until the middle of 2016 or later. In fact, based on the latest economic data, the probability of the United States entering into a recession is growing. It would not be a surprise to me (or my clients) if that happens in 2016.
Yet, listen to the Wall Street cheerleaders and everything is great! They say that the recent downturn in the stock market is a buying opportunity! They say stocks are on sale! The problem is that when an economy slows (and when it is battling deflation) that stocks that have already fallen 20% can still fall much further! In other words, cheap gets cheaper.
So how am I investing my clients money?
First, we continue to hold positions in the 20-year UST exchange-traded fund with the symbol TLT and the 30-year UST exchange-traded fund with the symbol EDV. They can be volatile and can be up or down 1-2% on some days and that can be unnerving. But, over time, these positions have the opportunity to produce stock-like returns (10% or more) without being exposed to the stock market.
In other words, these positions fluctuate based on the movement in the 20-year and 30-year interest rates. Here is the 10-year interest rate chart from Bloomberg as an example. With the 10-year UST down from the previous close of 2.20% to the current 2.12%, EDV is up +2.54% for the day and TLT is up + 1.56%.
Second, not that the Federal Reserve will likely keep interest rates lower for longer because of a slowing economy, I expect to be increasing the amount allocated to bonds while continuing to generally avoid stocks. Compare that to some large brokerage firms who are still recommending a retire have 70% of their portfolio invested in stocks! Talk about a disaster! To me, I can easily see allocations for retired clients with 70% in BONDS.
So it is likely that I will be adding more bonds to their portfolio using the symbols IEF and IEI. These are shorter term bonds that shouldn’t fluctuate as much as TLT and EDV but that should also see gains if/when interest rates drift down. Keep in mind that these bonds funds pay dividends along the way.
Third, even though the markets may be in a general decline (unless the Fed announces QE4), there will still be stock rallies and certain types of stocks that can do well in this environment. I will continue to have a small allocation set aside to take advantage of special opportunities as they present themselves. For instance, I just closed out my short S&P 500 position for a 1.8% gain.
For Common Sense Advisors, I’m Jeff Voudrie. Have a wonderful and blessed week!
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