Keep You Powder Dry!
At the current time, we are not investing any of our cash reserves until the stock markets reverse back up in a more positive trend. As noted below, both the S&P 500 and the Dow were down significantly last week. The markets ended essentially flat today, with the Dow closing up 4.74 points and the S&P 500 closing down 7.61 points.
We have not sold any positions during this latest market selloff. That is not our style. But when we invest cash reserves back into the market, we have found that it pays to wait for the market to stop dropping, if it has been doing so.
The mechanics of the Cassandra Model tell us which individual stocks to sell, or considering selling, when their time has come. And it tells us which individual stocks to buy when we do put cash reserves into the market, either because we have sold a position and have that cash to reinvest, or as a result of our policy of staging into the market instead of dumping a large sum of cash into the market at one time. These policies have done extremely well for us over many years and over many market cycles.
As is the case with Newton’s Law of Motion, which states that objects that are in motion will stay in motion until a force diverts them, stocks that are moving in a particular direction tend to stay moving in that direction – until they don’t. Eventually some event or condition will make them reverse direction. We use a variety of economic and financial tools to help us discern when the markets are reversing from a trend. It is these tools that will tell us when to start investing our cash reserves in this market. That has not happened yet. We will keep you advised through this Commentary section of our newsletter when we believe it is time to start investing cash reserves.
The phrase “keep your powder dry,” reportedly first used by Oliver Cromwell at the Battle of Edgehill in 1642, has come to mean to stay calm and wait for a better opportunity. We give the same advice to investors in this rather volatile market.
Economic and Investment Highlights
Last Week
European Union election results showed a widening of divisions in the European bloc, posing the threat of greater instability in the EU.
Tariffs and trade tensions are increasingly hurting U.S. industries in both higher costs to manufacturers and lower demand for U.S. products. Trade tensions have also been hurting stock prices and bond yields world-wide.
Bond yields across the globe have been falling, reflecting concerns that global economic growth is slowing.
U.S. crude oil supplies have been growing at the strongest pace since 2016, stoking fears of oversupply.
Home price growth slowed in March; and U.S. new and existing home sales fell in April, continuing a softening in the U.S. housing sector. In a potentially positive sign for housing, mortgage rates dropped below 4%.
The Fed sees trade tensions as a risk to the U.S. economy. This is giving them pause in their current policy of holding rates steady.
Trump threatened a 5% tariff on Mexican goods out of an apparent frustration with Mexico’s lack of action in stemming the flow of Central American asylum seekers.
Enrollment in U.S. colleges and universities declined for the seventh straight year.
U.S. inflation picked up in April with the price index for personal consumption expenditures rising a seasonally-adjusted 0.31% in April from March. The core PCE price index rose 0.25%. Inflation still remains well below the Fed’s 2% target, a level considered by many economists to be consistent with solid economic growth.
The Dow Jones Industrial Average declined for the sixth consecutive week. The S&P 500 declined 1.3% for the week.
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.
The Aruoba-Diebold-Scotti Business Conditions Index (ALS) has been trending up the last several weeks and is now very close to the zero line. The ALS Index advanced slightly again this past week. This is a very positive indicator for the economy on a short-term basis.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2019 is 1.3 percent on June 3, up from 1.2 percent on May 31. This slight adjustment continues to support the ALS model assessment of an improving short-term economic environment.
The New York Fed Staff Nowcast stands at 1.5% for 2019:Q2.
The Chicago Fed National Activity Index (CFNAI) showed a decline in economic activity in April. The Chicago Fed National Activity Index (CFNAI) was –0.45 in April, down from +0.05 in March.
All told, these short-term economic indicators are a positive analysis for the economy, at least on a short-term basis. It should be noted that all but the CFNAI showed slight upticks in the past week. There was no new reporting for the CFNAI in the past week.
Expectations that stock prices will rise over the next six months is at 24.8%, an unusually low level, in the latest AAII Sentiment Survey. The historical average is 38.5% for the survey. Two out of 5 individual investors are pessimistic about the short-term outlook for stocks. Please see the AAII Sentiment Survey for the complete results.
The latest Gross output (GO) reading suggests slow economic growth as we enter 2019.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of May 10, 2019) predict real GDP will grow at an annual rate of 1.9 percent this quarter and 2.1 percent next quarter. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.6 percent in 2019, 2.0 percent in 2020, 1.9 percent in 2021 and 2.3 percent in 2022. The forecasters predict the unemployment rate will average 3.7 percent in 2019, 3.6 percent in 2020, 3.7 percent in 2021, and 3.9 percent in 2022.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Conclusion
We continue to believe the economy is in a stable but somewhat vulnerable state, although recent economic reports have been showing signs of weakening. Nonetheless, it has remained fairly strong. In fact, the extremely strong first quarter GDP showing and the strong labor market conditions still give us confidence that the economy, now in its tenth year of expansion, can continue to grow. But we are cautious on this outlook! Please see our complete Economic and Investment Review in the Winter 2019 quarterly issue of the Intrinsic Value Wealth Report Newsletter.
Even with the further pullback in the market this past week, the broad market remains overvalued, although the Dow Jones Industrial Average looks more fairly valued than the broad market. But that does not mean that a market correction is imminent. Markets can and do stay overvalued for long periods of time. As discussed above and in the Economic and Investment Highlights section of this Commentary, we believe the economy is in a stable but vulnerable state. If the economy remains strong, the markets will likely remain strong. If the economy deteriorates, the markets may well correct. There are other events that could trigger a market correction, of course, but economic conditions are the most likely and foreseeable events that could make that happen.
We believe it is important to maintain a long-term view toward investing. This means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
The New York Stock Exchange Bullish Percent Index Went Into Bear Confirmed
Status on May 14, 2019
Announcements
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers.
Dr. Wendee will be speaking at the Las Vegas Investment Club on June 24th. He will be speaking on the topic of his popular Forbes article, Nine of the Best Ways to Build Wealth. Please contact Mike Lathigee at mike@mikelathigee.com if you would like to attend.
Dr. Wendee will be speaking at FreedomFest during its annual conference in Las Vegas, July 17 – 20, 2019.
Dr. Wendee will be a judge at the FundingPost June PitchFest Event on June 11, 2019 in San Diego. Click on this link for details on the event:
https://www.fundingpost.com/event/reg1.asp?event=433
Business 539 – Financial Management – On May 9, 2019, Dr. Wendee started teachingBusiness 539 – Financial Management at California Baptist University (CBU). Dr. Wendee teaches courses in Finance and Economics at CBU.
Management 3080 – Business Responsibility in Society – Dr. Wendee will be teaching Management 3080 – Business Responsibility in Society at California State University, Los Angeles (CSULA) starting August 22, 2019. Dr. Wendee teaches courses in Management at CSULA.
Dr. Wendee will be presenting a paper on enterprise value creation at the International Leadership Association’s annual global conference which is being held in Ottawa, Canada this Fall.
Our coffeehouse in Vista, California, Bistro on Main Street, had a record-breaking crowd during Vista’s Strawberry Festival over the Memorial Day Weekend.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth
RESOURCES
See our Resources section for links to economic and other resources used in the preparation of this Commentary.