“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Chuck Prince, Citigroup CEO - July 2007.
The non farm payrolls came out stronger than forecast last Friday & also confirmed that the US unemployment rate remained unchanged at 3.8%. This means that it remains below its moving average and therefore we can ignore the signal from the timing indicators for now and remain invested. In any event as discussed in my last post the headline indices have turned positive in this regard again after the strong first quarter from equity markets around the world.
This has come on the back of the US Federal reserve calling a halt to further rate rises and possible unwinding of QT for now. The recent IMF Q1 update to their outlook is quite useful in this regard as it suggests a slowdown this year in Global Growth to 3.3% followed by a recovery to 3.6% for 2020 and thereafter, although they do acknowledge the downside risks & policy priorities to avoid these. See here for full details and the graphic below.
Thus investors heaved a sigh of relief and piled back in after the Q4 wobble. Whether this is maintained and markets push onto new highs or fail at or below the previous peak will be data dependant form here. If we see some recovery in the economic data and perhaps a resolution to the China trade issue then In that event, may be this could just be the mid cycle slow down that was mentioned in the Cycles research I highlighted recently, which could then lead onto a record breaking economic expansion into the 2020's perhaps?
I suspect markets, perhaps after an interim swoon (sell in May type thing), could then resume their upward progress as defensively positioned investors and those sitting in cash might them feel compelled to pile back in for fear of missing out or FOMO as it is called. I saw some good stuff about these type of short term market dynamics etc here: https://fat-pitch.blogspot.com/2019/03/weekly-market-summary.html
While on the other hand if weak economic data continues or get worse then I suspect we may see the market have a setback to retest the Q4 lows in that instance. If we then slide into recession then we will be into a bear market, although so far most of the data does not suggest that's likely in the short term at least. It does however remain a risk for the medium term into 2020 I suspect. Unless of course the Central Banks can keep economies and markets going by cutting rates, keeping QE in place and making the correct policy responses if they see weakness as the IMF suggests.
For now it seems that we need to stay on the dance floor as market technical and the economic background remain constructive. You do however need to be aware of the risks you are running given high valuations in the US, although as I mentioned before maybe we are less exposed in the UK given valuations here? That may of course be a triumph of hope over experience and the apparent cheapness may just reflect the damage done to the UK by our incompetent handling of the BREXIT process?
Any way if you have the time it is worth reading the following post from John Hussman for some longer term context on the current situation we find ourselves in. Even though he is often seen as a perma bear, he too is dancing along while the music plays and the market set up remain "constructive" as he calls it. https://seekingalpha.com/article/4253224
If not then enjoy the appropriate titled song from dear old Steve Miller, because if you keep on Dancing you never grow old and you never stop Compounding either!
March turned out to be another positive month for UK equities with a total return of just under 2% from the All Share Index. This rounded off a positive quarter as global equity markets recovered in a v shaped fashion from the big sell off at the end of last year as the US Federal reserve blinked and stopped raising interest rates. Thus for the quarter the All Share returned 8.67% and this has helped to turn the monthly timing indicators that I produce for the UK market positive again for the main indices such as FTSE 100 & the FTSE All Share. The Mid & Small Cap indices remain below their averages, probably reflecting their greater exposure to the domestic economy and the fears about the effects of BREXIT on the UK economy, but more on that later.
Meanwhile the Compound Income Scores (CIS) Portfolio had a stronger month in March with a total return of 4.4%, thereby recouping most of the under-performance seen in February. This leaves it up by 13% in the quarter & year to date some 4.34% ahead of the All Share. Since inception it is now up by 74.43% or 14.95% per annum over the four years it has been running. This compares to 24.16% & 5.57% over the same time frame and annualised for the All Share index which I use as a comparison. See the Portfolio link above or at the top of the site to see the full table of returns over that time frame and a graph of the performance against various UK indices. As it is an anniversary of sorts, I am hoping to do an update post on lessons from investing full time for a living over the last 10 years for me personally and for the CIS over the last four years. So do check back for that later in the month.
In light of the return to a positive reading from the timing indicators I have reinvested the cash that was retained last month and added two new positions funded by this cash and the proceeds from one stock that flagged up as a sell due to the fall in its score. I was happy to see that one exit. There were two other stocks whose scores had fallen into the potential sell zone, but as they are both decent dividend growth stocks suitable for long term compounding given their long history of dividend increases I decided to give them the benefit of the doubt for now. Subscribers to the Scores will be able to work out which stocks I'm talking about from the Portfolio and they will see the stock sold and the two new positions in the transaction and reflected in the Portfolio when the Scores are updated today. If you'd like to learn more about the Scores and how you can access them, details of the portfolio and transactions then please click here or on the Scores navigation tab at the top of the site or in the three bars if you are on a mobile or tablet type device.
Despite my reservation about the outlook for global growth etc. and the potential for a recession at some point in the next year or two it does seem that all the BREXIT shenanigans have left the UK market looking pretty good value and this could protect it from some of the downside if the worst should happen on the economic front down the line. In this regard I would refer you to a recent interesting set of slides from Research Affiliates which showed that the average retiree in the UK should be OK going forward as a 60/40% portfolio in the UK is forecast to offer fairly attractive real returns if their projections turn out to be any where near right. They also suggest UK equities are priced to provide very decent future returns, albeit with potentially high / normal volatility of close to 20%. You should note that these are unhedged US$ returns, so I guess they could also be factoring some recovery in Sterling into that too perhaps?
So despite all the BREXIT concerns in the short term the above suggests that the outlook may not be as bad or as bleak as the main stream media make out or maybe it has created an opportunity? As you know I tend to agree with that view that it is time in the market that counts, but nevertheless I'm still keeping an eye out for trouble on the economic horizon, but in the short term that too seems to have cleared up a bit as Central Banks seek to keep the show on the road.
Meanwhile on BREXIT I suspect it will be resolved one way or another fairly soon. There is an outside chance that we could crash out without a deal on 12th April. I would however attach a small probability to that as the majority of MP's don't want no deal and they have stupidly ruled it out any way. In addition the EU don't want us to leave either and since a no deal would be worse for them then they are almost certain to grant another more lengthy extension I would have thought. I then believe this will lead to a much softer or BREXIT in name only, if at all. Alternatively as I have suspected from day one we may be forced to vote again and get the "right" answer as far as the political elite / EU are concerned. Indeed they have already suggested that the second referendum should be a choice between whatever "deal" on a soft BREXIT in name only they eventually come up with or on remaining, with leave not even being on offer on the ballot paper, which I guess would ensure the result they want! See this interesting piece on the likely way forward called UK Independence Day Cancelled which appeared recently on the Market Oracle web site & included a link to his very prescient piece from about two years ago about the Game Theory Strategy the UK should have followed to win, which then predicted the shambles we find ourselves in now.
Thus given the UK market looks cheap, the pound is probably undervalued, institutional investors are largely underweight and BREXIT ain't happening I think the UK could actually do relatively well. So you probably should keep calm and carry on compounding for now, although as I said earlier I remain on alert for signs of deterioration in the economic outlook which might signal more difficult times ahead. I think this is especially important given how mature the current economic and stock market cycles are at this point and the levels of debt in the world which have been encouraged by Central Banks super easy monetary policies over the last decade. Plus the fact that it is not clear if we are out of the woods yet as markets remain below their recent highs, so this could still be a bear market rally for all we know.
With that in mind if you have read this far, as a reward I'll leave you with this link to the Q4 letter from one of the Top Performing Macro Hedge Funds last year, who benefited from their bearish stance and who still see us as being in a market which is vulnerable given their Macro Model has topped out, valuations, debt levels etc. Enjoy and don't get carried away out there with this Q1 rally, as if we end up with a Corbyn led government then heaven help us and all bets are off!