Atlas Market Report
January 1st, 2019
Market Commentary (Key items you need to know):
- 2019 Outlook by Ronald E. Lang
- Additional Market Commentary by Allen B. Lang
- Fun Links (always popular)
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Key items you need to know –
What should we expect in 2019? This Atlas Market Report will provide some insight and bold predictions for you to digest and ponder. It is near impossible to not discuss some political impacts, but not be political. Avid readers of our newsletters know that we never take a side nor do we bang the drum on any major political issue. But whether we like it or not, it affects our lives and our investment portfolio’s.
The overall markets looked pretty good through September 2018, then “BOOM”. We realize the last three months have been stressful and have found that several clients, friends and acquaintances all have their opinions on the volatility of the market. What I found, their thoughts were the top headlines depending on their political affiliation and what TV network they got their news from. There isn’t one or two specific reasons for the volatility, but some had a greater impact than others.
Here are some of the factors:
- Negative tone, news and instability around the Executive Branch. – People (investors) like stability and certainty. The Executive Branch releases statements to the public to provoke responses, many times around a feel good strategy to prop up the markets. It worked until it didn’t work and the markets responded in the last three months. Investors want to know the people around the President are the smartest and emotionally stable people the administration can find to execute their agenda. When key positions become a revolving door, people get worried.
- Profit-Taking – we have been on a major Bull run for almost 10 years and for several investors, they are just harvesting profits, possibly offsetting some losses, but locking in profits and performance. Same with Hedge & Mutual Funds. It was time to lock in profits and performance and nibble away back into their high-quality positions. This is the same strategy as many good investors do with their money, especially in their retirement accounts because they aren’t affected by a tax event with profits.
- The Fed – The Federal Reserve has been steadily raising rates over the last few years. By raising rates they are conveying that the economic numbers are good and we need to slow down lending for banks. This is essentially their brake pedal. They tap on their brakes when the economy heats up and lowers rates when the economy slows down (i.e. hitting the gas pedal). Our economic numbers have been very good with record low unemployment, low inflation, rising wage growth and the consumer spending like an unmarried sailor on leave with a pocket full of money. The Fed makes decisions on the markets for liquidity and credit availability to banks, but are and should be unaffected on their decisions to raise or lower the rates based upon volatility in the markets.
- Trade Tariffs – One item that we didn’t discuss or forecast last year was Trade Tariffs. Why you may ask? It wasn’t a topic of conversation or concern. Since Q1’2018 the Executive Branch has been applying Trade Tariffs to China and other countries as a negotiating strategy to get those countries that have been taking advantage of the USA over the decades to the table to re-negotiate. Without getting political, I applaud the effort and there has been bi-partisan support for this by Democrats and Republicans. The efforts from prior administrations have been anemic at best, a lot of bark and very little bite. Now, I don’t know if this is the best way or the on-going rhetoric on Social Media is helpful, but let’s focus on China for a moment. China and most Asian countries are very proud people. As a culture if you shame them or attempt to take the oxygen out of their air, it could have negative repercussions. Trade Tariffs have started wars, that was one of the main reasons why the Japanese attacked Pear Harbor (READ the section “Diplomatic Background”). The G20 meeting to discuss trade talks was all “window dressing”. There was no way in a matter of hours at the G20 that of all the top people meeting with a host of complicated issues and an abundance of complexities with a domino effect was going to be resolved. They decided on a halt of new Trade Tariffs for 90 days and new Tariffs go into effect. Now the Chinese particularly could outlast the USA on this as they know the President has a finite amount of time he will be in the White House and could get their goods from other countries. The inflamed rhetoric doesn’t help and if there is a trade deal to be done, the Chinese must save face, not shamed and walk away like they got something positive out of it. By stating that they need to get rid of their tariffs on American goods and putting Chinese laws in place to eliminate Intellectual Property rip-offs, will not work unless the Chinese feel they received something in return. Whether you feel that is right or wrong, that needs to happen. Doesn’t matter whether you like or don’t like Trump, we are at the point of no return and need to move forward or all the shame will be on the USA and will get taken advantage of more in the future and will never have leverage or footing in any trade negotiation talks ever again.
Download Your 2018-2019 Tax Planning Guide
(courtesy of www.BrinkerSimpson.com)
Just a few suggestions we have given in the past to help your sanity.
First, don’t look at your 401(k) or portfolio account balance every day. At worst review once per quarter, but at most once per week. We recommend reviewing once per month.
Second, don’t go dumpster diving. Stocks that are either at 52-week or all-time lows are there for a reason, they are “stinking up the joint”. They have frothy dividends for a reason, their stock prices has been cut in half or worse. It is possible that they are in a business or industry that is just getting hammered right now or just in the wrong part of the economic cycle. If you look for value, when you go dumpster diving look for the following; low or no debt, valued assets, change in senior or C-Level management and Insider Buying. These are key factors that they may be worth a look. If not, leave in the dumpster and close the lid.
Third, are you investing or trading. At Atlas, we only work with investors. Trading your account(s) is not what we are about and ultimately you will lose money if you don’t know what you are doing. Do not think you are smarter than the billion dollar hedge funds or the Wall Street investment banks? You aren’t and neither are we. If you do the homework, review the research and only follow key analysts with a positive track record, your chances of beating the market are in your favor. Trying to trade on a daily or weekly basis is practically a futile effort. If you are in for the long haul, be smart about your decisions, especially when you are within 5-10 years of retirement.
Sectors to Focus on in 2019
Energy – this may be another flat to negative year for the Energy companies, but their dividends look very tasty. Consider the MLP (Master Limited Partnerships) pipeline companies. These are very steady companies that distribute the majority of their profits to shareholders. Many have dividends that are 5%-7% annually. Make sure you review their debt burden and they show growth over the next 3+ years.
Pharmaceutical – Last year we liked the Biotech and Pharmaceutical sector and in the beginning of 2018 the Biotech sector roared and the Pharmaceutical sector did ok, but mainly a flat overall year. In 2019, the Pharmaceuticals are on sale. Look at some of the best balance sheets and low P/E ratio’s that pay a good dividend to add to your more defensive positions. They are steady stocks and many have fortress balance sheets and with an uncertain market, those consumable brand companies should do well and more smart money will find their way towards this sector.
Technology, Retail & Industrials – These are three(3) sectors we would shy away from. Technology has been leading the market over the last 9 years and took us down in the last quarter of 2018. With the economic backdrop and political uncertainty, Technology will drive the the market to an overall flat level in 2019, except for the Technology companies that are showing growth and increasing profits. Retail has had a decent year in 2018 as most of the top retailers are trying to move more traffic towards their on-line presence. Amazon still continues to add market share and the next best company that is doing well with their on-line presence is Walmart. Much of their success comes from buying power to help their on-line margins. The rest of the retail sector will suffer into 2019 and 2020. The Industrials will be strongly impacted by the Tariffs. I will be wrong about this if there is a Trade Agreement in the first half of 2019 that is in the USA’s favor of the key and core items that we were fighting for since this all began. If the tariffs continue through most of 2019, this sector will be hurt the worst, especially the blue chip multinational Industrials.
Market Predications in 2019
These are the toughest predictions because other than the fundamentals of the USA-based stocks, it’s nearly impossible to predict how the political, international markets, geo-political, Fed decisions, Trade Tariffs, negative domestic events or other types of environments will affect our markets. Because of that we can only focus on the fundamentals and they are all pointing to an up year.
Now, if you read last years 2018 Market Outlook, I was expecting an up year and everything looked fairly good until December. Without rehashing all the factors that brought us down from the October 3rd highs, the fundamentals and the underlying economic numbers are still strong and the best among the top and most well-developed countries in the world. The most important Tax Reform item that was passed end of 2017 was the Corporate Rate Tax Cut. I wan’t a fan of many of the other reforms because I don’t believe it went far enough to help in the bottom half of the socio-economic groups. The Corporate Rate Tax Cut will show how much of a positive impact it had after Q4’2018 Corporate Earnings reports in January/February 2019. This is important because you already started to see more money go into Research and Development and Mergers and Acquisitions. Wage growth has been on the rise too so that specific Corporate Rate Tax Cut has had the desired affect on companies and will continue to through 2019.
In summary, despite the better Corporate Tax Rate and solid estimates for earnings, I believe it will have too many headwinds on the markets and expect an inverted yield curve (of the 2-year & 10-year Treasury Notes). The inverted yield curve typically predicts a recession within an 18-24 month timeframe. But with the volatility of our markets today compared to historical events, it could happened within 12-18 months, once it inverts. We expect the S&P 500 Index to be flat to negative in 2019. I like to be optimistic and there will be good opportunities to invest your money, but the overall market should be relatively flat by the end of the year.
Expect more volatility. As the items mentioned above reach a boil, either independently or collectively, expect the markets to react accordingly. It’s time to get more defensive and everyone has their own Risk Profile, but by adding to high-quality stocks that pay a dividend, you should be affected less than many of the high-flying growth stocks. Going after dividend yielding stocks may not be sexy or exciting, but there will be less volatility and more restful nights sleep ahead for you. Factors that would prove me wrong to help the market have its last Bull run before a recession is the following; there is a Trade Agreement in place with China and most if not all the Tariffs are removed, the Mueller investigation proves no collusion with Russia and no major geo-political news that will affect our USA-based markets. If those three things happen, we could be up 15% or more from 2018 S&P 500 index year-end close numbers. Stay with quality companies in the market as the more defensive and conservative strategy will guide you through.
What is an “Inverted Yield Curve”?
CLICK HERE (excellent article explaining the Inverted Yield Curve)
Other Predictions (pure guesses, but not outrageous):
10-Year Note – 2.5% (last year: 3%)
Inverting Yield Curve (2-Year & 10-Year) – will invert in 2019 (meaning a recession is within 18-24 months away)
Oil – $50-$60 (Last Year: $50-$60) – I really have no clue about Oil and predicting its price
Gold – $1,300 – $1,400 (Last year: $1,200 – $1,300) – I really have no clue about Gold and predicting its price
Bitcoin – Forget it! (Last year: Oy!)
Political – Mueller Report will be bad news, More Government Shutdown’s and no resolution to the Trade Tariffs. (Last year: GOP lose one of the houses in the Mid-term elections)
Infrastructure Legislation – It will be proposed in 2019 & passed. (Last year: Bi-partisan agreement.)
Superbowl Champion – New Orleans Saints (Last year: New England Patriots) If I would have known the Eagles were going to make it, then I would have chosen my home team.
NHL Stanley Cup Winner – Nashville Predators, but I was probably a year early with my Tampa Bay Lightning pick last year (Last Year: Tampa Bay Lightning)
NBA Championship – Golden State Warriors (Last year: Golden State Warriors)
MLB World Series Winner – Boston Red Sox (Last Year: Cleveland Indians (lookout for Washington Nationals))
In Summary (same as last year)
Life is good, go buy Grey Poupon mustard and start burning those hundred dollar bills while you are sipping Cristal Champagne. Good advice? Of course not and those of you that have been avid readers of our newsletter and know me, Ron Lang personally, knows that I’m an investment mother hen to my friends and clients. Yes, we are more optimistic now more than we have been in probably 10 years with the economy and over the next 2-3 years with the stock market, but don’t be a pig with your investment winners. Don’t be greedy with your investment thoughts. Be diversified and allocate properly. Everyone is different. If your neighbor, drinking buddy, Maj Jong group, golf comrades, faith-based community members or even your auto mechanic gives you investment advice, think twice. Someone may have a good investing idea, but it doesn’t mean it’s a good investment for you. This is where people make some of their greatest investing mistakes; investing in ideas where you know nothing about it or not seeking investment advice from a licensed professional with an excellent track record.
Of course investing can be fun and on occasion you may want to invest in something that interests you but have no real knowledge in that business sector. That’s fine, as long as it is a small part of your portfolio. Be smart and know your risk profile. We wish you best in 2019, a happy and especially a healthy new year.
Ronald E. Lang, Principal
Atlas Wealth Management, LLC
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Market Commentary by Allen B. Lang, Senior Portfolio Manager
Dear Clients and Friends,
What a Roller Coaster.
Will it continue through 2019?
What to look for.
First, the markets roller coaster will continue.Volatility will scare a lot of people, but holding good, well
established companies with proven track records and a history of increased dividend growth, should ease tension. Income-oriented preferred securities will provide some stability (see Fed below).
Second, The Federal Reserve is “hell bent” on raising rates to the extent that the 2 Year will get to 3%, the 5 year to 3.25% to 3.5%, and the 10 year to 3,5% to 3.75%. But, as I have said before, they were late in raising rates from the market collapse in 2008 and now have gone too fast to get to historical averages. One or two raises in 2019 is what I believe the Fed should do, NOT 4! All this truly depends on continued economic growth, unemployment statistics, GDP and GNP.
Third, I expect the unemployment rate will stay around 3%. I think our growth rate will be around 2.75% to 3%. After several good years of auto sales, I think sales will tail off significantly in 2019. The need for housing is not slowing, it’s rising. But the cost of new housing is climbing very quickly and the 25-40 generation is having a difficult time finding affordable units. Hence, the need for more and larger apartments will grow.
Fourth, US trade relations with China, Europe, Canada, Mexico and South America, I believe will “iron itself out” over the next several months, and bring some semblance of stability and an agreement on tariffs that’s fair to all countries.
Fifth, OIL. What a nasty word. Where will prices go? Who knows, I don’t. But, if you didn’t know it, the US is increasing its oil production by 1.5 million barrels a year, and Is now the largest oil producer in the world. I think (?) this might bode well for lower fuel costs overall and offer better stability for the next year or two.
Sixth, Predictions. Last year my numbers for this hit in August. Much earlier than I thought. Since then the markets have slipped about 11%, overall. The key for 2019 will be, in my estimation, the fourth quarter sales and earnings reports, which we should start to see in the second, third and fourth weeks of January. If, and it’s a big if, the numbers are good, I expect a higher market for the most of the first quarter. Also much depends on
outside factors, like interest rates, trade, economics in other countries, etc. The politics in the US, with Democrats and Republicans splitting the congress may just stifle needed legislation such as infrastructure, education and healthcare. I hope not.
Market Commentary authored by
Allen B. Lang, Senior Portfolio Consultant
Atlas Wealth Management, LLC
*We cannot make specific Stock, ETF and Equity recommendations in this report. Call us to discuss what’s on our watch list that may be a fit for your portfolio.
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