Quarterly Commentary – January 2019

For the year 2018 the Standard & Poor 500 Index fell -4.38% but of greater significance was the -13.52% decline of the 4th quarter. Other markets, such as the NASDAQ (many of the technology companies are traded on this exchange) were even more dramatic down -17.54% during this past quarter. One bright spot I suppose is that interest rates fell during this time frame and the U.S. Aggregate Bond Index gained 1.64%. (All rates of return information found at www.morningstar.com)

Some are saying that we are in the midst of the next big stock market crash and compare the results of the past 3 months with the stock market crashes of 2000-2002 and 2007-2009. Yes, I am a big advocate of historical analysis but before we read too much in to this comparison we need to understand what brought about the 00-02 and 07-09 crashes. The late 90’s was a time of incredible change in technology and the birth of .com companies. The stock market got way overvalued. As an example, the NASDAQ rose 84% from September 1, 1999 to March 10, 2000 (2734 to 5048) obviously a surge in prices that was unsustainable.  Those were indeed crazy times. Then as the markets were starting to stabilize in the summer of 2001, 9/11 hit and the stock market continued its downturn and bottomed out in October of 2002. To further illustrate the market overvaluation at that time the Price Earnings ratio (P/E)* of the S&P 500 was close to 30 and it is now at 18. In other words, the valuation of the S&P 500 stocks at January 1, 2000 was 66% higher than now.

Leading up to the 07-09 bear market was a housing market during 2004, 2005, 2006 that was totally unsustainable. We have looked at new housing starts in the U.S. from 1959 forward. The “magic” line of new housing starts is 1 million. Meaning if new housing starts are 1 million or more the industry is doing well and if below the industry is not doing so well. Why is housing so important? With a nod to Hillary Clinton it “takes a village” to build a home. You have the excavation, concrete, framing, electrical, plumbing, flooring, roofing, furnishings, etc. Many jobs go in to building a home. So, when housing is strong the economy tends to be strong. Back to 2004, 05 and 06 we were building more than 2 million new homes per year. ** Along with that the banks were giving loans to about anyone who could breath and making things worse by enticing people by offering low “teaser” interest rates that after six-12 months would rise and therefore increase the homeowner’s monthly payment. In mid-2007 this gravy train came to an abrupt stop and new lending came to a standstill. To compound that the teaser interest rates started to expire and payments went up to a point that homeowners could not pay. One foreclosure led to another, unemployment went through the roof and we entered in to what is referred to as the Great Recession.

At this point we have neither of the above. True tech company values rose dramatically but the big difference from 1999 is that the internet is now a major part of our lives (not just a dream of what was to come) and companies are actually making money. Housing is not overheated by any means. Prices have risen dramatically but there is not a glut of homes on the market. Housing starts last year were a bit over 1 million.** This is after many years of rebound from the 500,000 homes or so that were built annually from 2009-2012. Keep in mind that the number of homes per year that are demolished is around 400,000 so in effect we had very few net new homes built for years. We still have a shortage of homes, not a glut.

So, what is happening now? We are experiencing a Correction (10% decline) and leading to a Bear Market in the NASDAQ (20% decline). Will this decline go further? It certainly could. In late December my gut told me we would bottom out soon. Then the circus in Washington DC ramped up to even higher levels and the market was unhappy how Chairman Powell explained the Fed’s interest rate outlook for next year and on top of that China said its growth is slowing. Not stopping, mind you, but slowing. So, in light of all of this the stock market is going through some very uncomfortable gyrations. However, this is what we do know:

    • U.S. unemployment rate is 3.9%***
    • There are more job openings in this country than unemployed
    • 30 Year Mortgage Interest Rates are at 4.5-4.75% compared to 8% on December 31. 1999****
    • P/E of the S&P 500 18 versus 30 at the end of 1999*****

Last but not least 400-600 million in India and China have moved to the middle class and are buying automobiles, consumer goods, educating their children and travelling, i.e., spending money, lots of money.

I may be dead wrong but this does not look to me anywhere like the past 2 market crashes or for that matter the crashes of 72-74 or 29-33.

Our advice is to remain allocated and let the markets work through these rocky times and yes, keep an eye on history. We have been here before; the economic ship gets righted and rationality once again takes over.



* P/E is a method to measure the price of a stock to the earnings being generated. Higher P/E means that stocks are trading more expensively to their actual earnings while a lower P/E typically means that stocks are trading less expensive.





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