GREAT start to 2020!

I am proud to announce our portfolio not only held up well in the storm that was January, it grew by an average of 2.24% vs a decline of (0.20%) in the S&P 500.  Much of the S&P 500’s decline was attributable to the final days of January as fears of the coronavirus spread through global markets.  Here’s a recap:

1. Market outlook: An old market adage, the “January barometer,” says “As goes January, so goes the year.”  It will be interesting to see how this affects investor sentiment.  As you know, I’ve been gloomy on the stock market since May 2019, and fully prepared to see the beginnings of the next major market decline (40-50%) begin sometime this year.  The coronavirus MIGHT be the spark that lights the fire, but these scares are typically short-lived, producing selloffs of 5-10%, but the not the serious longer term bear market I’m forecasting.  What are the core issues that concern me?

1. 1. Inverted yield curve: You’ve heard it ad nauseum from me, and yes, the yield curve remains inverted at some points, even now, 13 months after the initial inversion!  This is serious and if you hear anyone say “it doesn’t matter this time,” turn the channel.  This timely metric has preceded every major recession and market decline since the early 1950s.

1. 2. Corporate earnings decline: Corporate earnings growth is the fuel for the engine of stock market growth.  2019 was a year of disconnection between these two.  Q4 earnings reporting has begun, and overall estimates for 2019 total growth is single-digit, yet the S&P 500 Index rose 29%!  NOT CONNECTED – driven more by euphoria than core growth!  Furthermore, the forward P/E ratio (current stock price/2020 estimates earnings) has grown to 19 from 14 in one year.  As a benchmark, this figure is historically ~ 15.

1. 3. Corporate stock buy-backs: Corporations have been buying back their stock on the open market at a dizzying pace, which supports price increases.  I believe that these will begin slowing in 2020 as companies find the need to preserve cash.

1. 4. Federal Reserve: The Fed lowered interest rates 3x last year.  The Fed doesn’t lower interest rates unless it has concern about future economic growth. Period.  I believe we’ll see interest rates lowered again at least once in 2020, and possibly 2x, in June and Dec.  Much of the recent stock market rally is a “liquidity rally,” meaning the Federal Reserve has been pumping $60B/mo into the monetary system by buying short-term Treasuries in the market.  Much of this $60B creates free-flowing liquidity to purchase stocks.  This action known as Quantitative Easing is also artificially propping up a WEAK stock market.

1. 5. Jobs: Yes, the unemployment rate remains at all-time lows; however, the monthly new jobs gained has slipped from the 200k+ average we saw for much of 2018-2019 to ~150k over the past 3 -4 months, and I believe will continue to decline.

2. Portfolio outlook: Our defensive Recession Portfolio is poised for strong growth in 2020.  As you know, we finished 2019 with an average gain of +12.2%.  I fully anticipate another double-digit year of return.  Understand, we grew 12% last year when stocks were in vogue; when they are no longer in vogue, investors will flock to safety – to what you own.
   1. Gold: Staying very strong, now ~$1580/oz.  I maintain we’ll see $1750 by year-end.

1. 2. Bonds: Again very strong.  With the 10-yr Treasury now dipping back to the 1.5% level (after rising to almost 2% in the Fall), I’m confident we’ll see rates at or below this level.

1. 3. Preferred stocks: Our sleeper position yielding ~5.5%/yr, and staying modestly calm.  Now, if stocks drop hard, these will drop also, but much, much less.

1. 4. Short ETF: Our Dorsey Wright short position took a beating in the last 3 months of 2019, but has rebounded sharply.  Again, another strong defensive position in your portfolio when stocks decline.

I’ll leave it at that for now – looking forward to seeing all my clients this month as we hold our 2020 Strategy meetings!  Wishing you a fantastic week ahead,

Paul

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