Happy new year, or newish at any rate seeing as we’re about to leave January much like we left the decade behind. February might feel like a surprise if it weren’t for the fact that we’re a little surprised over here that it’s not already April, the year has been full steam ahead from the get-go and showing no signs of powering down. Luckily, it’s already been a year of promise and opportunity.
New year, new decade, new day but the market continues as always and as always the market news speaks mostly to noise. The past year presented us with such glorious highlight reels that included the likes of the inversion of the yield curve, trade policies, and the looming of a potential recession. The media continues to inundate us all with diverse and diverging opinions on all of these, but that really goes back to the adage if it bleeds it leads.
True as the adage may be the question remains, is a recession on the way? There will eventually be one of course, there will always be another, but our indicators are still pointing it as unlikely for 2020. Unemployment is at three and a half percent, the lowest it’s been in fifty years, the housing market is still booming, and even though we’re sitting on a 128-month period of economic expansion the market still appears to be undervalued. In fact, some economists are actually pointing to the market being undervalued by twelve and a half to thirty-seven percent. Profits are not collapsing by any measure and if they continue to rise there’s some very real additional growth potential.
By the by, that 128 months of expansion is the longest period of recovery on record in the US, each new month with this is a new record.
Yield curve inversion news was seemingly everywhere last year and while the inversion was certainly worthy of our attention it is not an actual event itself, it is just one of many potential signals. Just because the yield curve inversion seemingly heralded in past recessions doesn’t mean it will continue to do so moving forward. The world is a much-changed place and with it forces driving the market, we continue to monitor it for the signal it is while watching a wide range of other indicators as always. What is more likely to be a more significant indication and a potential cause to the next recession is the Fed being to tight. The Fed fund rate compared to the two-year nominal GDP is another indicator that is watched closely, if the Fed fund hits or goes above the nominal GDP that’s when we started looking more seriously at the possibility of a recession. It is nowhere near hitting that mark now.
The trade situation has been, let us say, interesting if maybe unnecessary. Much of the fear and the narrative here was that without a trade deal with China in place the stock market would not be able to gain any traction. That simply was not true. The market flourished in 2019, even with the trade uncertainty, and continues to flourish in the new year. There are persisting issues, but we are seeing some back off on both sides and are in fact entering phase one of a broader trade deal with China, never mind the market performing so well at peak uncertainty.
We’re not political commenters but it is an election year so here’s an interesting bit of information concerning the market, over the past nineteen elections a rising market tended to signal a victory for the incumbent but if the S&P 500 dropped in the late summer through early autumn then the challenger more often won. We bring this up only as an interesting signal and to point out that Presidential election years are historically some of the worst years in the market and tend to provide some additional volatility. It is not so much of a high concern as it is just another monitoring point. What we’ll be looking for with the additional volatility as always are additional opportunities.
Before signing off we just want to let you know that we will be reaching out to conduct new year reviews over the next couple of weeks but please reach out at any time before if you need anything at all or just want to chat.
Happy newish year, we hope yours is going as well as ours.
This report is for informational purposes only and is not a solicitation, or recommendation that any particular investor should purchase or sell any particular security. The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal. . Past performance does not guarantee future performance. The options expressed are those of Edward S. Kozun, III and Kozun Capital Management.