In The Know - June 2019

Christopher Chiu |

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves" - Peter Lynch


Market Condition: The equity market is currently in a correction. The market is now in day 5 of a rally attempt, reversing course of off of its most recent lows. The equity market has pretty much sold off through the month of May, and currently looks like it may have bottomed on June 3rd . On Tuesday June 4th the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial indexes reversed to the upside reclaiming their respective 200-day moving averages. The Dow Jones Transportation index and the Russell 2000 small cap index have bounced as well, but still remain below their respective 200-day moving averages.

Recent headlines: You do not need to look far to find negative headlines: more trade wars, more tariffs, the Mueller report, impeach President Trump, Attorney General Barr exposing “spygate,” China slowing, yield curve inversion, recession fears, and rising interest rates – falling interest rates. No doubt these headlines have played on the psyche of investors, as sentiment surveys reached extreme “fear” readings, as investors and fund managers raised large cash positions. Thus, if these perceptions are worse than true future reality - markets will rise. I believe these worse case scenarios will prove to be excessively pessimistic. As quoted by Baron Rothschild -“buy when there is blood in the streets, even if the blood is your own.”

The Economy: Generally speaking economic numbers continue to come in strong. The Conference Board Leading Economic Index (LEI) for the United States increased 0.2 % in April, following a 0.3% increase in March, and a 0.2% increase in February – no indication for a near term recession. There is some concern regarding the manufacturing sector as the ISM Manufacturing Index for May slowed to 52.1, however still showing that growth continues in the manufacturing sector. On the other hand the ISM Non-Manufacturing Index rose to 56.9 in May, indicating robust growth. In both indexes any number over 50 indicates expansion. Trade deficits came in $50.8 billion in April, a reduction, but mostly due to weakness in total trade, which is not really a good sign. May nonfarm payrolls came in lower than expected at 75,000, however the unemployment rate remained at a very low 3.6%.

Summary: The equity market was off to a strong start this year. As mentioned in last month’s letter it would be normal for some profit taking and consolidation, and that is exactly what we got in the month of May. On cue as the market pullbacks, everyone gets bearish, calls for the end of the world, and then the market roars back. It is not the end! Always try to keep an open mind; markets go up and down in any short time period. Patient investors who can stay calm, and take a deep breath through the panic are usually rewarded. Volatility is the price we have to pay for long term capital gains.