Today, the Dow Jones Industrial Average dropped 460 points, marking the worst day-drop since the 660-point drop on January 3, 2019. And both of these plummets were preceded by the worst December since the Great Depression. Is the Spring Rally over?
The bad news is that wasn’t matched with spending cuts, so the public debt is higher than its ever been – at $22 trillion.
On Wednesday, the Federal Reserve Board indicated there will be no interest rate hikes this year, and that they will stop deleveraging their own balance sheet at the end of this September. That seems like good news on the surface, particularly for interest-rate sensitive industries, like housing, and leveraged corporations that need to borrow money. However, since two of the primary economic concerns are overleverage (too much debt) and pricey valuations (bubbles), and since low interest rates contribute to bubbles and borrowing, continuing an accommodative stance risks exacerbating those two problems. Alan Greenspan, Warren Buffett, Robert Shiller and many other economists have all gone on record saying that stocks and bonds are in a bubble. Click to read through 12 Economic Concerns outlined in the Financial Stability Report that was released on November 28, 2018.
Also, having the Fed Fund Rate at just 2.25-2.50% doesn’t give the Federal Reserve much room to lower rates, and goose the economy, when things head south. The most recent GDP growth projections are for 2.1% growth in 2019 and 1.9% in 2020 – much lower than 2018’s 2.9% – which is why the Federal Reserve is pausing on their interest rate hikes. The 1st quarter 2019 GDP growth is predicted to be downright dismal – at 1.2-1.3%.
What Does All of This Mean for the Spring Rally 2019?
After the worst December (2018) on Wall Street since the Great Depression (1931) -9.13 and -14.53% in the S&P500 respectively, Wall Street came roaring back. The Dow Jones Industrial Average is up 10.5% since the beginning of the year.
Can the rally continue? Should you lean into the returns assuming there will be more wind at your back? Or is it time to take cover into a defensive position, and do a full assessment of the level of risk in your current plan?
To answer these questions, I did a big data crunch to determine…
* How well do March, April and May perform, when January and February are strong?
* Do they continue the trend or give back some of the gains?
* Is the pre-election year a rocket booster or a headwind on the Spring Rally?
And here’s what the 10-Year Data revealed.
* Most of the time when January and February are strong, the Spring Rally (including May) is weak.
* The average gains for the first five months of the year are 4.3%.
* The years with the strongest starts had the weakest growth, while the years with the stronger growth had negative (2010) or low performance (2015) in the first five months.
* The pre-election year is usually great for the Spring Rally. 2007 gained 7.9% in the 1st five months of the year, while 2011 saw a solid 7% jump over that same period. In 2015, however, returns were tepid, at 2.4%.
Another interesting point is that two of the strongest 5-month starts on Wall Street, in 2013 and 2011, came with forward projections of an improving economy. The recent projections were revised downward to a very slow growth of 2.1% growth in 2019. Wall Street veterans are always forward-thinking. So, today’s sell-off isn’t surprising.
April 26, 2019 is a Big Day for Bad News
On April 26, 2019, we’ll get the advance numbers for GDP growth in the first quarter of this year. Economists are projecting growth between 0.4% and 1.4%. That is significantly lower than the 4th quarter 2018 growth of 2.6%. Investors typically don’t respond well to such a sharp slowdown.
The Most Predictable Recession Indicator Just Flashed Red
The yield curve just inverted today, with the 10-year treasury falling .03 percentage points below the 3-month treasury yield of 2.46%. An inverted yield curve is 100% correlated with recessions over the past half a century.
Buybacks Dry Up During the Quiet Period
Bloomberg reported on March 20, 2019 that corporations had ceased buying back their own stock – a key driver of this entire bull market – and would stay on the sidelines throughout the 5-week quiet period before earnings announcements – through mid-April. As you can see from the below chart of buybacks, corporations purchasing their own stock is a perfect mirror of Wall Street performance. Purchases were at a high when Wall Street spiked in October. Both hit the pits at the end of December, only to rally strong through the first two months of 2019. Corporate buybacks are clearly driving Wall Street’s performance.
In short, there are far more red flags than green lights on Wall Street for the Spring Rally. December 2018 reminds us that when the winds change, losses can cut like a falling knife. The right answer is never all in or all out, but is, rather, a diversified plan that keeps enough safe, underweights the overleveraged companies and adds in performance. A well-diversified plan that is annually rebalanced forces you to do what you must do for successful investing in today’s world – buy low and sell high on auto-pilot in your nest egg. The days of Buy and Hope paying off ended in 1999.
2018 was a year when stocks and bonds lost money, which means that 2019 is the year that you need to know what you own, know what a healthier plan looks like and take charge – being the boss of your money.
Below is a list of the Economic Red Flags present in today’s economy…
Economic Red Flags
Prices are too high.
Debt is too high.
Growth is too slow.
Productivity is too sluggish.
There is an $879 billion U.S. trade deficit (2018 FY).
$22 trillion U.S. public debt (as of 3.22.19).
The Debt Ceiling was hit 3.1.19. X date should land in Aug/Sept/Oct.
1Q 2019 GDP will be released on April 26, 2019. It is predicted to be 0.4% – 1.5%.
The Feds have paused on rate hikes, and will stop balance sheet deleveraging at the end of September.
Consumer and fixed income spending are softening.
U.S. GDP is $20.9 trillion, while Debt is $22 trillion.
If you wait for the headlines on these red flags, it will be too late to protect yourself. You don’t have to understand economics to employ a time-proven easy-as-a-pie chart nest egg strategy that earned gains in the last two recessions (when most people lost more than half) and outperformed the bull markets in between. Blind faith that someone else is doing this for you can be very expensive. (It’s a good idea to get a second and third qualified, unbiased opinion on your current plan, rather than just trusting that your money manager has protected you.) Wisdom is the cure. (Click to read more about the High Cost of Free Advice.)