Talking Points – October 2018

Oct 31, 2018 – Can Media Coverage Tell Us When the Correction is Done?
This is admittedly a surprising article title from us considering we routinely encourage investors to avoid the noise and financial media, especially TV.

However, we found this study of Bloomberg articles on bear markets over the past several years to be interesting. As this sharp correction has gone on this month, the number of stories on bear markets has decreased and not gotten to the level of the past couple of notable corrections.

Source: Strategas

This is more interesting than it is necessarily actionable. However, we are always looking for ways to judge sentiment and it seems to align with other data we are seeing. Investors have certainly become less bullish, but not as negative as we would think considering the speed of the selloff. Not everything needs to align perfectly for a correction to end, but more negative sentiment would provide a higher level of confidence in the bottoming process.

Oct 24, 2018 – Some Things Not Acting Normal
Interest rates have been one of investors key areas of focus this year, particularly as volatility has picked up. However, today’s two charts show that areas of the stock market are not behaving in line with rates as they normally would. Why is that?

First, the 2-year yield has continued to climb higher, which normally is a good sign for the economy. Typically a defensive sector such as consumer staples follows in the opposite direction on a relative basis. However, with the 2-year inverted on the chart below we see a recent notable divergence.

Source: Strategas

Our next chart looks at the rise of the 10-year yield and its typical correlation with bank stocks. In this case even the highest quality bank has diverged from rates recently.

Source: Strategas

Plenty of theories could be made for these two divergences and perhaps they ultimately don’t matter. We think they are potentially important clues and want to monitor how they proceed.

October 3, 2018 – Key Market Today Compared to History
We believe it is important to have an understanding of financial history. Knowing what happened in the past and how today is similar or different than other eras, may provide clues.

We found today’s charts very interesting and full of information. For example, while todays P/E is above average, inflation is lower, interest rates are lower, taxes are lower and GDP is higher than the average dating back to 1950.

Source: Strategas

As Mark Twain reportedly said, “history doesn’t repeat itself, but it ryhmes.”

Quote Philosophy: “Hope is not a Strategy”

“Hope is not a strategy.” James Cameron

Filmmaker, James Cameron, has had an enormous amount of success with gigantic hits like Avatar and Titanic on his resume. Despite this, we interpret his quote as meaning it is always critical to have a plan in place and not hope that things work out. We couldn’t agree more.

Whether it is creating a financial plan or making sure you have the appropriate insurance coverage, no individual wants to be faced with simply hoping things turnout okay.

As investment portfolio managers, we think it is crucial to have a plan in the form of a disciplined investment process. Following a rules-based process allows for consistent decision making and reduced emotional behavior. Most important, as we discuss frequently, is having a strict risk management plan in place. The absolute last time you would want to be using hope as a strategy is when an asset you own is declining in price. Knowing your plan ahead of time will allow for better decision making in times of stress.

Source: Greg Towner, CFA, CMT