Six Months Down Six More To Go

We have witnessed the achievement of the longest bull market in history. The S&P 500 is up over 17% for the first six months of 2019, making this year’s performance the best six months of a year in 22 years. Now is a great time to assess the market cycle, health, direction, and projections. Time sure is flying. We have six months down in 2019 and six more to go! Let’s take a look at what led us to this historical year so we can leverage this information, make wise decisions and work our capital in our favor.

The financial markets are just one aspect of the economy. The general public assumes that the stock market is the economy. In reality, it’s only a piece of the whole picture. In my opinion the stock market is the most external appearance of the economy but doesn’t reflect the internal health. If the internal health is left unchecked than it will eventually seep out into the external appearance. 

Our midyear review will take a look at the external and also point out some of my favorite bits of  internal economic information. This information is important because it will connect the dots on how and why we got here today, while some of the other details will give us insight into the future so we can have a clear line of sight into the months to come.

Looking at the major indices year-to-date we see that the S&P 500 is up 17.2%, Nasdaq up 23.3%, Russell 2000 is up 16.6%, Dow Jones Industrials 13.9% & Dow Jones Transportation 13.7%. 

The top 3 performers are:

  1. Nasdaq 
  2. S&P 500 
  3. Russell 2000

We clearly see that technology companies are the driving forces of the stock market. 

When we dialed into the sectors of the S&P 500 we learned that our top performing sectors were the following:

  1. XLK – Technology
  2. XLRE – Real estate
  3. XlI – Industrials
  4. XLY – Consumer Discretionary

I also took a look at which sector outperformed the S&P 500 so far and that was XLK by 8.6%, XLRE by 4.2%, XLI by 2.4%, XLY by 2.3%, and XLC by 0.5%. These sectors show us where the money is flowing and where we should have been positioning capital or else just buy the S&P 500 for the 17.2% return. 

So how are the commodities performing? Glad you asked! Since the volatility of last year entered the markets, Gold has had a very healthy rise. Gold has accumulated a solid 10% gain in the past six months. This is not as impressive as equities but it’s worth paying attention to. More smart money i.e. institutions and hedge funds are buying up gold stemming from fears of a coming recession. Palladium has generated a nice 20.6% return. While Platinum is up at 5.5%, Silver is lagging at -1.1% year to date. Oil has been the best bang for the buck in commodities returning over 25.6% gains these first six months and is expected to continue its ascent.

The US dollar is slightly down while the Canadian Dollar is up 3.7%, followed by the Japanese Yen at 1.7% and the Mexican peso at 1.6%. 

I looked at the crypto market weighted by the Coinbase Index and we can clearly see Litecoin as the best performer over 270% while Bitcoin is over 197% and District0x at 169.6%. Only Litecoin and Bitcoin have outperformed the crypto index so that lets you know where the best bang for your digital monies is at. 

The externals look pretty strong, but the internal vitals are looking fatigued. Real GDP has been rising since 2016 but appears to be tapering off. Many economic institutions are forecasting a steep decline in the next quarter reports from 3.2% to about 2.6%. The FEDs have not been able to achieve their inflation goal with monetary policy so many believe the Feds use of this indicator is faulty and major risks are nested here. 

The US Treasuries Yield curve has been inverted twice and currently has been inverted for over a month now. This indicator confirms the economic slowdown to come and a very high probability of a recession to come within the next year. 

Wage growth is stagnant while jobs growth has taken a sharp decline as noted in the last reports. Unemployment rates are likely as low as they can go. We pretty much have a maximum employment, and this has mobility risk. Workers leaving jobs or being laid off will have a difficult time trying to find new work as most of the available jobs have been taken. 

Manufacturing data shows weakness as companies are slowing down on purchasing supplies they need to produce and sell.  If this continues this points to a not so bright future. Although mortgage rates are at historic lows consumers are not enticed enough to buy homes as we see a decline in new home sales. Auto sales are slightly better than flat, so this section doesn’t look bad, yet. We are seeing massive store closings in comparison to store openings. This year’s closures have already exceeded the entire year of 2018 with over 7000 closings versus 2999 openings. 

Consumer debt levels have now exceeded pre 2008 crisis levels with huge expansions in student loan and auto loan debt. Consumers appear to be over leveraged at these levels. Remember 71% of GDP comes from people spending and as long as people continue to rack up debt, we will see further deterioration until the spending reverses. 

The quality of mortgage loan risk has significantly improved since the Great Recession. There seems to be no adverse indicators at this present time.  However, The International Monetary Fund and the Federal Reserve have sounded the alarms that corporate debt levels are on an unsustainable path. Corporate debt is at record highs over 70% of GDP and for this reason I believe the corporate debt bubble bursting possesses significant risk to the economy. Lower credit quality companies have extremely high debt levels exceeding 08 crisis levels. With 71% of corporations are already projecting under-performance with respect to their targets from an earnings perspective we could see defaults mount up turning a economic slow down into a recession.

The US and China Trade war is still the most significant catalyst for the slowdown of the economy as companies are getting pinched and trying to move their operations out of China to avoid tariffs. China’s economy slowing down also poses a threat to the economy because of their presence throughout the world.

Europe is already in terrible condition with massive amounts of negative yielding bonds. Countries defaulting on debt poses a major risk to the global economy. Mario Draghi the head of the European Central Bank has announced his plan to unroll more stimulus to accommodate the European economy. President Trump had some unkind words accusing Draghi of manipulating the European currency making it harder for the US dollar to compete with the Euro. We also must keep our eyes on the BREXIT development regarding the Euro region which has a deadline of October 31.

The stock market is anticipating the FEDs to cut interest rates in a couple of weeks from now but that wouldn’t make sense based on the perception of the economy. The stock market continues to break record highs so why are they looking to create stimulus? Unless the deterioration is worse than we expect. It causes one to wonder… 

As we await fresh new economic data to be released ahead of the next FOMC meeting July 10, 2019 we shall get more insight on the decision of the FED. With GDP forecast lower I expect more economic slowdown and the market to follow the same lead as we move into the second half of the year. Let me know your thoughts Only time will show how all the moving parts play out so stay tuned Wallstreet Jackboyz and girlz. Happy Trading!

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