Macro Musings July 2019
FIRST HALF 2019 REVIEW
- MACROCAST™ continues to indicate a low probability of a sustained, recessionary bear market.
- The biggest weakness within MACROCAST™ is in the valuation category. After a near 20% rally over the past 6 months, all signals within the category are neutral or negative. Other VITALS were mixed to positive.
- As in Q1 2019, stocks and bonds continued to perform well, and the rise in equities did not lead to a selloff in bonds. Gold also rose while other commodities struggled.
- Finishing with a strong rally in June, the S&P 500 notched one of the best, first 6 months in market history. Prior years that showed similar first half strength often saw gains through the rest of the year but temporary market pullbacks can be expected.
THE MESSAGE FROM MACROCAST™
As a reminder, MACROCAST™ is Corbett Road’s proprietary investment model. MACROCAST™ measures the appeal of risk assets by assessing the VITALS of the market—Valuation, Inflation, Technical Analysis, Aggregate Economy, Liquidity, and Sentiment. By looking at multiple factors, we can better gauge market conditions and the probability of a major market decline.
The most recent score for MACROCAST™ suggests a large, sustained market decline is unlikely.
Valuations: Negative to neutral (more on that below).
Inflation: The only category that showed all positive metrics. Inflation remains subdued, giving the Fed flexibility to cut rates when they meet next week.
Technicals: Mixed. The market is trading above its long-term average, but many individual stocks are lagging as the index hits all time highs.
Aggregate Economy: Mixed. Strong job growth and retail sales data is offset by weakness in housing and manufacturing.
Liquidity: Mixed to positive. The yield curve inverted, but the Fed (and several other central banks) is prepared to cut rates and add more liquidity to the economy.
Sentiment: Mixed. Investors continue to pull money out of equity funds in record numbers, but other surveys we follow are becoming increasingly optimistic—potentially limiting further upside.
Valuations remain the biggest detractor. All of our valuation measures are neutral or negative. The same conditions that were in place at the end of Q1 remain. We’ve had a strong market rally, and while earnings expectations have risen, the stock prices have risen much more, causing Price to Earnings ratios (P/E) to expand at an accelerated pace.
FIRST HALF ASSET CLASS REVIEW: (ALMOST) EVERYTHING IS UP
Here is what we found most interesting about the first half of 2019 asset class performance:
1. Stocks and bonds both did well (again). Although stocks and bonds tend to rise together over the long run, it’s rare that both are as strong as they’ve been thus far in 2019. In fact, it is the best start for the combination of both asset classes in 24 years (from Financial Times):
2. US large cap stocks outperformed international stocks (again). Stocks of all sizes and across all regions did well, but the S&P 500 continued to outperform international markets. This has been a consistent occurrence since 2012 but recall the decade before saw more muted returns for the S&P relative to international and small cap stocks. This outperformance may not last forever, but it can go on much longer than anyone anticipates.
3. Gold had a great second quarter (this is something new). Gold struggled after peaking in 2011, but this quarter’s rally drove the precious metal’s price up to a 5-year high. Whether or not this is the beginning of a secular, multi-year rally remains to be seen.
A GOOD FIRST HALF IS MOSTLY BULLISH FOR THE REST OF THE YEAR, BUT EXPECT MORE VOLATILITY
The first half of 2019 was one of the best starts in market history. What has that meant historically for the rest of the year? The table below from LPL Research shows all of the previous instances when the market was up at least 15% through June 30. Since 1950, the market has seen similar first half gains 9 times and stocks added to those gains in 5 of those 9 years. Most years saw decent sized pullbacks in the final 6 months, with a median drop of 9%.
MULTIPLE 5% DECLINES IN A CALENDAR YEAR ARE COMMON
We have already witnessed one market decline of 6% this year, back in May. But it is common to see multiple 5%+ declines in a calendar year (from Alpha Architect):
Since the bear market bottom in 2009, 7 of the past 10 years have had multiple 5% corrections. Given the strength of the market and the history of second half declines, odds are we will see another one this year.
STILL POSITIVE ON THE REST OF 2019, BUT RAMP DOWN EXPECTATIONS
Despite our concerns, we still think a recessionary bear market between now and the end of the year is unlikely. MACROCASTTM remains positive, and, we believe the bull market is intact.
As always, thank you for your trust and confidence in Corbett Road.
The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as a suggestion of any investment recommendation, investment strategy, or as an offer of advice to buy, sell, or exchange any investment product or investment vehicle. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management, Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. MACROCASTTM is a proprietary index used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by MACROCASTTM nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities. Past performance is no guarantee of future results.
Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC, a Registered Broker/Dealer and member FINRA/SIPC