Quarterly Commentary – October 2019

So often these days opinion is presented as fact and facts are twisted to equal one’s opinion. We work very hard to give facts when there are facts and opinion when they are opinion. To us that is the right thing to do. This quarter we will tell you what we know, what we do not know and what our opinion is.

In a surprise to many the stock market, as measured by the Standard & Poor 500 Index, continues to show strength posting a year to date gain of 19.10% through September 30, 2019.

Keep in mind however that this index is heavily weighted by the size of company within the index. In other words, even though there are 500 stocks in the index they do not all carry the same weight in determining the rate of return. The larger companies in the index, e.g., Microsoft, with a market capitalization of over $1 Trillion (as of October 8, 2019) have a disproportionate impact on the performance of the S&P 500. As of September 30 Microsoft stock had gained 38.24% in 2019 and the value of all stocks in the S&P 500 was a bit over $25 Trillion so Microsoft, instead of just being 1 of 500 stocks or .2% of the index actually comprises 4% of the index and therefore impacts the return of the S&P 500 more than any other stock. So, when you look at this index keep in mind that large companies such as Microsoft, Apple, Google, Facebook and Amazon influence the up/down of the S&P 500 in much greater proportion than the other 495 companies combined. This is all interesting to talk about but not the question on most people’s minds.

What is on many minds and the most frequent question we are asked is “are we headed for a Recession?”  Here is our answer, Yes.  Why?  Because here is what we know.

Since 1797 there have been 17 recessions in the United States[1]. So, we know there will be a Recession as they are a natural occurrence in economic cycles. What we do not know is when the Recession will start, how long it will last and how deep an effect it will have on our economy.

First, we should discuss what defines a Recession. Most economist define a Recession as 2 consecutive quarters of negative Gross Domestic Product (GDP). Under that definition we do not statistically know we are in Recession until these 2 consecutive quarters have passed and the economists can look back and say “yes we are in Recession”. So, accepting that as our definition the next question logical question would be “how long does the average Recession last?”  Since World War II Recessions have ranged from 6-16 months with an average length of just under 11 months.[2] Now for our opinion. Our belief is that the upcoming Recession will be relatively short and not very deep. Why?

Long and nasty Recessions tend to be the result of severe abuses of the economic system of financial markets. Leading up to the Depression of 1929 Wall Street was indeed running wild. Margin requirements were so lax (purchasing stock with borrowed money) that in the 1920’s a person only had to put up 10 cents for each dollar of stock purchased[3] resulting in huge gains when stocks went up but equally huge losses when stocks fell. In 1929 there was so much debt that had accumulated in the financial markets versus the value of what was owned a drop in stock prices led to financial ruin and a substantial long term Depression. In the 2000’s unprecedented debt was repeated in the housing market and the ensuing collapse of prices led to the Great Recession of 2008, high unemployment and the stock market crash. We do not see those elements in today’s environment.

What we do see is a great deal of political upheaval, not only in the United States but many other countries ranging from the United Kingdom to Iraq, Afghanistan, India, Ukraine and on and on. Primary of these of course is the United States as we seem to have a daily onslaught of one investigation to another. So far Wall Street has pretty much shrugged off this drama and focused more on the continued growth of corporate profits and consumer spending patterns. How long will this continue? That is the question and frankly one we do not have an answer. What we do believe is that President’s (and we mean any President) may have the capacity to speed up or slowdown that engine that is the U.S. economy but they cannot change the trajectory which for the past 100 years has been in an upward trend. We believe in the lessons of history and that the results of this next decade will be no different.

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Past performance does not indicate future results. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Kestra Advisory Services, LLC. as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Performance figures are inclusive of dividends reinvested. Investors cannot invest directly in an index. Standard & Poor’s Index data can be found at http://www.standardandpoors.com/home/en/us. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. The Nasdaq Stock Market is an American stock exchange. It is the second-largest exchange in the world by market capitalization, behind only the New York Stock Exchange located in the same city. The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in U.S. The MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries*. With 2,154 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. EEM is an index of stocks in markets that are deemed to be emerging.

[1] https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011

[2] https://www.usatoday.com/story/money/2019/08/19/recession-what-does-mean-and-what-like/2030642001/

[3] https://www.albany.edu/~bd445/Economics_466_Financial_Economics_Slides_Spring_2014/Leverage_(Print).pdf