The big news this quarter happened near the end of the quarter in mid June.
Near the end of 2018 the FOMC, led by chairman Jerome Powell, were on record to increase rates three additional times after their late in the year .25% increase. Capital markets threw a gigantic hissy fit. Fast forward a mere six months later, Powell lead FOMC are no longer interested in raising rates and maybe even considering lowering rates, a possibility virtually no one thought probable late last year.
Capital market participants have a way of making their feelings known – it does appear that the hissy fit late 2018 was in response to too fast of a rate increase. While we may never know for sure, post Powell chairman negation of further rate increases, and possible future lowering of rates were met with capital market participant applause.
We still feel there is a lot of ground to cover before an actual rate lowering may occur, and with market participants pricing in an expectation of late July lowering of rates, certainly there’s a possibility of disappointment.
For the moment it appears that interest rates will not go higher, and will at the least stay where they are for the foreseeable future and maybe even go lower from the current 2.25% to 2.5% threshold.
Tariffs and the Slowing Global Economies
The lack of a tariff agreement has put, for obvious reasons, many company managers in a holding position. Combine this with some global waning of growth, and we have a slight macro slowdown.
Global slowdowns are normal, and should not be feared. Major downturn‘s are the crux of problems and are what the FOMC seem to be most fearful of above.
With earnings being the ultimate driver of capital markets, a slowdown would take the wind out of the sails of levitating markets
Inverted Yield Curve Update
The recent deeper and more prolonged inverted yield curve, not hugely inverted but definitely inverted may be signaling a recession to come. In our Q3 2019 newsletter we dig very deep into multiple charts and update our thoughts once again on the inverted yield curve. The bottom line with an inverted yield curve is no one knows when the eventual recession may occur.
While the investment skies are rarely sunny and blue, there are some overcast unknowns at this time. Sunny skies can happen very quickly with agreements and progress from different parts of the world.
We are conservatively positive, and look forward to how all of the cross currents play out in the next few quarters. Needless to say this is not a time to swing for the fences in investment portfolios, we would argue it’s never the time to swing for the investment fences.
Have a great summer will talk to you in early fall!
John A. Kvale CFA, CFP
Fourth Quarter 2018 Cover Letter
Thank you for your wonderful digestion of the recent market volatility.
We have seen so many reports, articles, studies that show this is more of the normal and what we had lived through for the past multiple years was less normal. However, what we have experienced most recently is what we become accustomed to. We’re not going to quote you some article or historical fact that says this is the norm-even we have been uncomfortable with the sudden movements.
Just like we all became more accustomed to low volatility and capital markets that seem to increase day by month by quarter almost without ever dropping, we will again get used to this type of movement.
We don’t like it, and would rather not have it, and yes history says it’s more the norm but we’d rather have the abnormal – this is where we are now. We thank you for all of your confidence and once again given the recent volatility we are happy we are a more conservative firm.
It is a true statement that Markets have predicted 10 of the last 4 recessions. Meaning they often fret over things that do not occur, but that extra fretting tends to be correct is some cases. We acknowledge that the global economies are not growing “Red Hot” fast like they were last year, however we refute a global meltdown or imminent recession at this time.
After promising (Federal Open Market Committee – FOMC) multiple rate increases as recent as October (four to be exact) at this time that is not going to happen. With rates being somewhat a reflection of inflation, and inflation being wrung out of the system via technology and outsourcing, rates are likely near their “New Normal” range.
Earnings are the ultimate driver of capital market returns and interestingly they continue to be churning out very nice, taking into account the market recent volatility, valuations have become much less stressed and even cheap in many cases.
In Closing
Your Fourth Quarter summary is enclosed on the front page of this report we have included our most recent investment allocation from your Investment Policy Statement. This is also the time we attach our Private Policy Statement for the year along with our opportunity to offer our latest ADV filings; Requests for review will be accepted via phone, mail or email, and mailed immediately upon request.
Sincerely,
John A. Kvale CFA, CFP
J.K. Financial, Inc.
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