Tuesday, January 7, 2020

January Market Update - Commodities Rising

The S&P 500 gained 2.86% in December. For a summary of market returns for 2019, read Visual Capitalist's post How Every Asset Class, Currency, and Sector Performed in 2019.  After dropping significantly in October 2018, commodity prices have begun turning higher.  This increase and an upturn in inflation may be substantial economic themes for the first half of 2020. As I wrote in the March Market Update of 2019, the United States has never experienced 138 months of economic expansion. Remember, this is how long it will be if this economic expansion lasts until the U.S. presidential election in November. We know what increasing inflation and slowing growth means. Yes, stagflation season in the U.S. economy. Will it last for a couple of quarters and then reverse? Now let's review price, sentiment and valuation as we start 2020. Happy New Year!

Price
Source: dshort blog, Moving Averages: December Month-End Update

To start 2020, we see "invested" for all five asset classes in the Ivy Portfolio system. DBC, the Invesco DB Commodity Index Tracking Fund, which was the last asset class to join the "invested" party has finally accelerated enough to turn positive. It is the first "invested" signal for commodities since October 2018. Jill Mislinski reported for the dshort blog at Advisor Perspectives:
All three S&P 500 moving averages are signaling "invested" and all five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), Vanguard FTSE All-World ETF (VEU), iShares Barclay 7-10 Year Treasury (IEF), and Invesco DB Commodity Index Tracking Fund(DBC) — are signaling "invested."
The iShares Barclay 7-10 Year Treasury fund (IEF) is the closest to signaling "cash." We'll keep watching to see how much momentum is left in this market.

Sentiment
Source: CNN Business Fear & Greed Index

The CNN Business Fear & Greed Index is starting 2020 with an "Extreme Greed" reading. This set-up in the market is the polar opposite of what we observed toward the end of December 2018 when this index had near record-setting low readings in the single digits, signifying investors were feeling extremely fearful. For another sentiment reading, please read Jesse Felder's post Stock Market Sentiment Has Only Been This Bullish Twice Before Over The Past Two Decades. Jesse Felder highlights the Rydex Ratio in his post. For anyone unfamiliar with the Rydex Ratio it is the measure of Rydex traders’ assets in bear funds and money market funds relative to their assets in bull funds and sector funds. He shows that traders are more bullish in this current environment than at the peak of the dot-com mania. Therefore, both the CNN Business Fear & Greed Index and the Rydex Ratio show market participants are extremely bullishly positioned to start 2020. As Warren Buffet reminds us for the third month in a row, "Be fearful when others are greedy and greedy when others are fearful." Besides rebalancing portfolios, I've included some basic tips on financial planning in the summary section below.

Valuation
Please click on chart to enlarge.
Source: Charles Schwab

Please reread Liz Ann Sonders market commentary Any Weather: Valuations Say Stocks are Cheap and Expensive, which I highlighted last month. In her article, she explains the definitions of the 13 valuation metrics in the chart above. Moreover, she gives examples detailing why valuation metrics are more of an indicator of market sentiment than fundamental research. In our current investment landscape, we can use these valuation metrics to make a case for investors in both bull and bear camps. I've written many times about how valuation measurements are not useful as a market catalyst, however they are important when analyzing market returns over the next decade.

Summary
To start 2020 all asset classes are signaling "invested" according to the Ivy Portfolio system. Investor sentiment is "Extremely Greedy" according to the CNN Business Fear and Greed Index. Valuations for U.S. stocks remain elevated for 9 of the 13 valuation measurements sited by Liz Ann Sonders.

What are investors to do? Let's remember the basics of financial planning:
  1. Don't spend beyond your means.
  2. Educate yourself. 
  3. Pick the right field. 
  4. Save and invest early. 
  5. Don't swing for the fences. 
  6. Keep yourself covered.
  7. Be wise about a windfall.
  8. Hang onto cars and houses.
  9. Avoid debt.
The list above comes from Kiplinger's 10 Secrets of the Millionaire Next Door. I first highlighted this list in 2014 and they updated the explanations for each item in April 2019. I'll now add my six favorite financial planning questions for individual investors to periodically ask themselves:
  1. How much cash do I need to feel secure with my finances? 
  2. Do I have a written investment plan and process? 
  3. How does each investment enhance my portfolio? 
  4. Am I adequately insured against catastrophic risks? (i.e. auto, house, life, disability, long term care, longevity, health insurance, etc.) 
  5. Have I created and implemented my estate plan? Is it updated? 
  6. Do I have an evaluation framework for my portfolio? (i.e. Am I aware of the costs of my investments? the diversification of my investments? the risk/volatility of my portfolio? the tax impact of my investments? and do I have a method for tracking my performance?) 
As Warren Buffett said, "If you're emotional about investing you're not going to do well. You may have all these feelings about a stock, but the stock has no feelings about you."

Let's end with a couple more quotes:
"Happiness is neither virtue nor pleasure nor this thing nor that, but simply growth. We are happy when we are growing." - William Butler Yates
"Whoever is happy will make others happy, too." - Anne Frank
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.
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