What’s going on with this market?
If you live in Minnesota, you could compare the past six months of the stock market to our current weather pattern, super unpredictable. It’s great one day and miserable for the next seven. We get a nice run and then a blizzard arrives to bring us back to reality. How do you prepare? It might be t-shirt and shorts weather when I leave home in the morning, but there’s a chance of snow in the afternoon. Every fall, my wife makes sure both of our cars are stocked with extra winter gear and hand warmers, just in case some nasty weather arrives. She has a process, a system, that works for us. The same can be said for how we invest our clients hard earned dollars. We have a process, we are hoping for bright and sunny days, but do our best to be prepared for the cold and wet ones.
Lately, the stock market seems to care about two things. First, our ‘trade war’ with China, and second, what is the Fed going to do about interest rates. It seems like the news on the trade war front changes everyday. One day we have a trade deal, the next day China backs out. Just today they announced some new tariffs on goods imported from Mexico, so now how is that going to play into all of this? It is pretty unpredictable. Fortunately, the Fed is a bit more predictable. The mandate of the Fed is to support moderate, or healthy levels of inflation and to maintain full employment. You can’t fake the economic numbers, so their decisions are pretty easy to predict.
So with some things that are predictable and some that are not, how do we invest and still make money with the market crashing at times? First off, please know that there is no foolproof way to invest and make money all the time. Markets go up, they go down, and past performance is no guarantee of future results. With that being said though, things generally follow patterns, the hard part is to know where the pattern is and where it is going. To go back to my wife and her process of having winter clothes in the trunk of the car, we also have a process for investing. We graph the rate of change of corporate earnings on the y-axis and the rate of change of inflation on the x-axis. This gives us four distinct ‘quadrants’. These quadrants are our signals of where to invest. Currently, the United States is in what we call quadrant 4. Companies are still making money, they just aren’t growing as fast as they were a year ago. And inflation growth is also slowing, so prices are rising ‘less fast’ than they were this time last year. We moved into quad 4 in late September of 2018 and have been there since.
I know I’m making this sound super simple and foolproof. Believe me, it is neither. Like I said above, just because something has happened before doesn’t mean it will again. We think certain sectors will do well relative to the rest of the market, but it doesn’t always work that way. And we aren’t always right about what quadrant the US economy is moving into. My goal for investing for my clients is to be right more often than not. Taking a quick snapshot of the market today (5/31), the S&P 500 is down a little less than 1% at lunchtime. Six of the seven sectors, or asset classes I have my clients invested in ranging from stocks to bonds are all beating the S&P 500 with four of them actually being positive for the day. This obviously can and will change over the next few hours, but I would take a day like today as a HUGE win. There have been other days like today and I’m hopeful that there will be more. On the flipside, there have been many days that are the opposite of today and I can guarantee that there will be more. The goal is that over the long run, my clients do better than their benchmark, which depends on how much risk each person is willing to take.
The Standard & Poor’s 500 index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.