Talking Points – September 2019

September 25, 2019 – What a Market Top Looks Like

There seems to be an increasing number of negative sounding investors that are concerned about the market crashing and/or a recession. It is important to keep in mind, that major market tops are fairly rare. The numerous 5-20% corrections throughout a market cycle are a normal part of investing. The challenge becomes trying to determine when one of those normal corrections could be the next major top that involves a deeper and longer lasting decline.

Below, we look at a checklist of key factors typically seen near the end of a bull market and then compare today with the last two major market tops. Presently, none of the factors are in the red danger zone.

In 2007, about half of the factors were in the danger or warning zones, while in 2000 nearly all were.

Source: Strategas

Only the benefit of hindsight will tell for sure when the next bull market top has been made. However, through comparing key factors with history and importantly utilizing our stop loss risk management discipline, we have a plan in place to try and minimize the decline when that day comes.

September 18, 2019 – What Happens When the Fed Cuts Rates?

If the Fed meets market expectations, they will cut their interest rate by .25% this week. That may not sound like much, especially since the market already expects it, but today’s chart shows how notable it could be.

Historically, when the Fed is not just one and done, but does a second rate cut, like this one would be, the stock market has very strong 6-12 month forward returns.

Source: Ned Davis Research

Obviously, every circumstance is a little different and this one data point certainly does not guarantee positive returns. However, it is typically wise not to fight the Fed.

September 11, 2019 – Leadership Change

Markets rotate creating both opportunities and risks. For most of this year, the U.S. stock market was driven higher by a combination of growth stocks and defensive areas, such as REIT’s and utilities. However, the past few days have seen a substantial rotation away from the areas that have worked into the most beaten up. Stocks in the energy, retail, financials, small cap and broadly speaking value categories have shifted higher while the previous winners and growth in general have gotten hit hard.

Our chart today, shows the significant difference just on Monday of this week. The year’s worst performing stock quintile outperformed the year’s best performing quintile by 4.8%. In just one day!

It is hard to know if this will be a long lasting rotation into new long term winners, or just a brief reversion to the mean. We have been and will continue to look for opportunities to trim expensive and extended holdings for more attractive securities. However, it is important to not lose sight of the longer term. Investors that try to outperform in every short term period will find themselves over trading, inevitably leading to poor performance.

Source: Greg Towner, CFA, CMT