November Economic and Portfolio Review
November was definitely a TOUGH month for our portfolios vis-à-vis the S&P 500. While the broad market was +3.4%, our average portfolio saw its first monthly decline, -0.5%. Reiterating my sentiments from last month’s review, we are solid year-to-date, with an average portfolio gain of +11.3%; however, significantly below the S&P 500’s blowout year of 24%.
Why?
Simply put, the recent stock market rally since mid-August is nearly unprecedented with a gain of 10.5% (Dow Jones Industrial Average - DJIA) in just 74 days. During this euphoric rush to equities, our defensive portfolio strategy focused on bonds, gold, and preferred stock, has suffered as investors shunned safe havens and flocked to the risk of stocks. I maintain our belief that this current stock market has more risk than reward at this level. As I explained back in May when we began to exit stocks and build out the Recession Portfolio, my only concern was we might be early in implementing the strategy – this has definitely proven true.
However, what we see in the stock market rally since mid-August has historically proven to be a precursor to a “blow-off” top. According to a CNBC article of Dec 4, 2019 (https://www.cnbc.com/2019/12/04/bull-markets-often-end-with-a-euphoric-rally-called-a-blow-off-top-we-may-have-just-had-one.html), Ned Davis Research points out that since 1901, DJIA stock market “blow-off tops” were preceded by an average gain of 13.4% in just 61 days. This level of short-term gain is very similar to what we’re seeing now. I’m not declaring this is a “blow-off top,” but it certainly appears we are indeed stretching the limits of this rally.
Why?
- Inverted yield curve: Never forget that an extended inverted yield curve of US Treasuries (Dec 8, 2018 initial inversion) has preceded EVERY market decline since the mid-1950s
- Obsession with China Trade Deal: This is almost the total focus of today’s markets – stocks, bonds, and gold. Although President Trump announced in early October that a Phase I deal was “forthcoming and near,” it has yet to materialize. The next significant date is Dec 15th, when additional US tariffs are set to hit China imports.
- Manufacturing contraction: The US manufacturing index registered its 4th month of contraction in Nov. Although this represents a small sector of our economy, it has historically been a good forecaster of future economic direction.
- Employment: Today’s report of 266k job gains in Nov represents a SIGNIFICANT departure from the declining monthly job reports we’ve seen over the past 6 months. Certainly, this will maintain consumer spending strength for the foreseeable future. However, one month doesn’t make a trend, and I am anxious to see how the next 2-3 months read before I relinquish this negative trend for the economy.
- Declining corporate earnings: 3rd qtr earnings for the S&P 500 slowed to 2.7% year-over-year, a far cry from the double digit growth we saw in 2017-2018. More importantly, year-over-year trailing earnings for the small-cap S&P 600 Index actually DECLINED -16.3% during this period. This divergence between large and small cap companies has not been this pronounced since at least 2002. (Source: Seeking Alpha Nov 26, 2019: https://seekingalpha.com/article/4309133-third-quarter-earnings-eased-market-fears-will-reprieve-last
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