September Market Update: Prudent Risk Management

The S&P 500 posted a -1.81% return for the month of August. The trailing 1-year return for the S&P 500 as of August 31, 2019 was a wee 0.86%. The concern in the market is that, a bit over a decade into the recovery from the financial crisis, a trade war between the U.S. and China could create a substantial drag on the global economy and push the U.S. into recession. When the 3-month T-Bill and 10-Year Treasury bond curve inverts for one quarter which it did at the end of June, it historically has been a warning signal to investors that they need to reduce risk exposures of their investments. To learn more about this phenomenon please listen to Men Faber's podcast episode #172 with Professor Cam Harvey. Campbell Harvey is Professor of Finance at the Fuqua School of Business, Duke University and a Research Associate of the National Bureau of Economic Research in Cambridge, Massachusetts and he wrote his 1986 dissertation on the topic of yield curve inversions preceding recessions. Let's review price, sentiment and valuation as we enter September 2019.

Price

Source: dshort blog, Moving Averages: August Month-End Update

Jill Mislinksi writes the following at the dshort blog:

All three S&P 500 MAs are signaling "invested" and four of five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), Vanguard FTSE All-World ETF (VEU), and iShares Barclay 7-10 Year Treasury (IEF) — are signaling "invested".

Both U.S. and foreign stocks switched from "cash" to "invested" at the end of June. VEU almost switched to "cash" during August. Currently VEU is the most vulnerable asset class to switching position. As I mentioned last month, the two-year chart of the S&P 500 continues to look like its in a topping process which started in January of 2018.  REITs have signaled "invested" since the end of January this year and treasury bonds have signaled "invested" since the end of November 2018. Commodities have signaled "cash" since the end of October 2018.  Watch the WTI crude chart for signs of weakness or strength in the economy. WTI price peak for 2019 remains April 23 at $66.30 ($US/bbl).

Sentiment

Source: CNN Business Fear & Greed Index

The CNN Fear & Greed Index started the month of September at "Extreme Fear." We observed sentiment decrease during the month of August, from a starting position of "Neutral" to an ending position of "Extreme Fear." As of this writing, on September 7, this index has increased slightly to 35,  however remains on the "Fear" side of the measurement spectrum. The CBOE Volatility Index (VIX) decreased during the first week of September going from around 20 to around 15. It wouldn't surprise me to see the VIX intermittently rise between now and the end of the year as slowing year-over-year Q3 economic data is reported and processed by market participants.

Valuation
I'll turn valuation analysis over to Jill Mislinski writing at the dshort blog for Advisor Perspectives. She does great work and it's fun to highlight their analysis periodically. Read the post Is the Stock Market Cheap?

Source: dshort blog, Is the Stock Market Cheap?

Summary
Price action, according to the Ivy Portfolio system, starts September signaling "invested" for four out of five asset classes. Commodities (DBC) are signaling "cash." Sentiment is fearful. Valuation for U.S. stocks remains elevated. The most important three sentences I read during August come from Economic Cycle Research Institute in their news item published August 14, 2019 titled, Recession Risk, Rate Cuts and the Future Inflation Gauge, where they wrote:

"In the current cycle, that inflation downturn signal arrived in September 2018. But the rate cut cycle has only just begun – with a ten-month lag. As we noted many months ago, over the past 35 years such belated rate cuts have always been associated with recession."

My runner-up for sentence-of-the-month goes to Fed Chair Jerome Powell speaking at the "Challenges for Monetary Policy" symposium, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming on August 23, 2019 where he said,

"Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade."

Let's end with two Warren Buffet quotes:

"The most important investment you can make is in yourself." 

"If you get to my age in life and nobody thinks well of you, I don't care how big your bank account is, your life is a disaster."

As always, wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

--------------------------------------------------
Here's what I've been reading, listening to, and watching recently:

• Episode #172: Cam Harvey, “This is a Time of Considerable Risk of a Drawdown” (Mebfaber.com)
• Country Risk: A 2019 mid-year update (Prof. Aswath Damodaran via YouTube)
• The Anatomy of the Coming Recession (Project Syndicate)
• Letter From Pebble Beach: What a Disappointing Classic Car Auction Tells Us About the 1%—and the Economy (Fortune) 
• Recession Risk, Rate Cuts and the Future Inflation Gauge (ECRI)
• Schwab Market Perspective: Storm Clouds Building (Schwab)
• Think individual investors are set to power stocks to new highs? Think again, says Ned Davis (MarketWatch)
• July Cass Freight Index Report shows ongoing declines (Logistics Management)
• How Americans Make and Spend Their Money, by Age Group (Visual Capitalist)