Market Recap & Looking Forward:
Stock market at record highs. Bond yields near record lows. Worst December in history. Best January in decades. Worst May in 50 years. Best June in 80 years. Vol spike. Vol crush. All in. All out. Time for rate hikes. Time for rate cuts. Markets and investor psychology are all over the place. I’ll try and be the opposite of that in this note (but I can’t promise anything).
At the end of June, the much anticipated G-20 meeting came and went in Japan without much action. Yes, President Trump and President Xi met in Osaka, and yes, no additional tariffs were imposed. However, the tariffs that existed before G-20 remain in effect today. While a left-tail risk event was avoided, the existing tariffs are clearly crimping global growth. On the growth front, here’s what I’m watching (in particular): 1) economic data releases coming out of U.S. and China, especially PMI data; 2) global bond yields - using our 10-yr Treasury as a proxy; and 3) U.S. corporate earnings and guidance, which begins in about 10 days. That being said, it's no surprise that markets have been partying. The Fed is cutting rates later this month (according to the bond market - which has pegged the chance of this happening at 100%). The bond market has almost always been right in calculating interest rate hike and cut probabilities for many decades, so I, too, believe that the first rate cut in the U.S. since 2006 is a few weeks away. But since we are in a "bad news = good news" environment, look for any surprise in the data (to the upside) to shake things up.
In U.S. equity markets, the S&P 500, Dow Jones and Nasdaq annualized roughly 150% (on avg). in June (see COMPS below). For the year, U.S. indices are annualizing returns at a 40% clip. For many reasons (the previous sentence being one of them), the second half of 2019 will likely call for playing more defense than offense.
If there’s one chart below that deserves your attention vs. the others, it’s probably the second one. That chart illustrates the current amount of global, negative-yielding debt. The number is nearly $13 trillion. That’s unbelievable. For central banks around the world: what’s left to fight the next global downturn?
Worldwide Equity Index PE’s & Current Dividend Yields (‘Cheaper’ Markets & Higher Yields are Outside the U.S.):
Negative-Yielding Global Debt is Nearly $13 Trillion…Come Again? Yes, That’s Correct:
German Bunds: Negative Yield
10-yr Treasury Yield: Round trip from 2016
June Index COMPS (S&P 500, Dow Jones Industrial Average & Nasdaq): Huge Month for U.S. Equities:
2019 YTD Index COMPS (S&P 500, Dow Jones Industrial Average & Nasdaq): First Half Puts 2019 On Track for a 40% Year:
The S&P 500 Reclaimed ATH’s (again):
S&P 500 Weekly Trading Envelopes (mid-2016 to mid-2019). A pullback in the near-term looks more likely than not:
Bloomberg World Market Cap remains roughly 10% under ATH’s (even after a huge June, globally, in equity markets):
Dow Jones: bullish inverted head & shoulders or bearish multi-top?
PE Ratio on the S&P 500 has repriced meaningfully since late-December; this can continue:
Bond Market Pricing in 100% Chance of a Rate Cut in July:
JPMorgan’s Global Manufacturing PMI Index Sub-50 = Dismal Global Growth:
Nasdaq’s Christmas 2018 Gift: > 30% Gain in 6 Months. Time to Ring the Register? Not a Bad Idea:
For all of its ‘Side-Effects,’ the Healthcare Sector may be setting up for a favorable risk/reward trade in the back half of the year. It's been out of favor so far in 2019 and might be due for a catch-up. The 2 charts below on Healthcare are particularly interesting.
Relative Rotation Graph (hard to see; Healthcare is the purple line in top left & in the ‘Improving’ Quadrant):
Healthcare (XLV) Monthly Chart shows $96.00 & $86.00 are important (and $96.00 is much closer):
MLP’s (AMLP): Coiling to the Point of Decision-Making (Over $10.00 or under $9.70)
No Such Thing as a Triple-Top?
Transports & Small Caps: 2 Important Market Bellwethers’
Transports’ Important Channel from the lows in 2009: Middle of Channel
Small Caps Important Channel from the lows in 2009: Middle of Channel
Transports & Small Caps: Both Have Diverged From The S&P 500
Transports vs. S&P 500 Notable Divergence (Weekly Chart): Usually a Warning Shot
Small Caps vs. S&P 500 Notable Divergence (Weekly Chart): Usually a Warning Shot
Here are the key drivers that we see as most important in this market (in no particular order as they are all significant):
U.S. - China Trade Talks: How will markets react to an eventual deal with China? Will there ever be a deal that addresses the priorities of nation? What’s priced in? The G-20 event in late June kicked the can down the road (which is what this market loves and rewards). Not much has changed here. Tariffs continue to crimp global growth.
Oil is Holding Steady over $50/bl: Higher oil prices with slower global growth isn’t a good combination, and that’s where we are today. Away from that, $50 remains a key level to hold for all markets, especially high yield.
Earnings and Guidance: Lackluster revenue and forward guidance have been the themes thus far in 2019. Does this change with Q2 earnings prints? They, along with corporate blackout periods, are about to begin.
Interest rates and the Fed: The Fed refused to end the current cycle in 2016 and seems adamant on trying to avoid it again now. The Powell put is newly formed – but its strength and reliability is TBD. After all, he went from hawkish to dovish on a dime. Powell pivoting back to hawkish (if the data picks up) isn’t far-fetched. But without strong data, the odds of a rate hike(s) for the balance of 2019 is zero. And even if growth picks up, the odds are still near zero. The market is now pricing in rate cuts starting this month and there’s likely more than 1 cut coming.
Debt: Debt quality is deteriorating at the same time debt levels are very elevated. While there has been some deleveraging in households and the much of the banking sector since 2008, both corporate debt – away from financials - and debt to GDP are at nosebleed levels that can add fuel to the next bear market. The growth of the triple BBB corporate bond market is especially worrisome.
WENNCO STRATEGY INFORMATION
Wennco Downshift ETF Hedged Equity Strategy Update:
Since inception (7/1/18) through 6/30/19, Downshift ETF’s performance was 1.19% (net of Wennco fees) vs. 10.41% for the S&P 500 Total Return Index.
There are numerous hedged equity strategies that exist in today’s marketplace. During the first 12 months of Downshift ETF’s existence, the return profiles of our competitors’ hedged equity strategies were all over the place. But to illustrate the difference in how our hedged equity strategy 'hedges' (or was hedged in times like Q4 2018) vs. our competition, I am going to compare our first 12 months to 2 competitors who, after our first full year, arrived at a very close destination as we did:
GATEX (Gateway Fund) & SDRAX (Swan Defined Risk). Both are highly regarded (and highly invested in, AUM-wise) hedged equity strategies. The strategies returned 1.38% & 1.67%, respectively, during the 12 months ended 6/30/19 (vs. 1.19% for Downshift ETF). We arrived within 19bps & 48bps of these competitor destinations while being more hedged. Q4 of last year was the difference and reason for this. Downshift was down -4.58% during Q4 2018. GATEX & SDRAX lost -7.50% & -10.30%, respectively, during Q4. (The S&P was -13.52% in Q4 2018).
GATEX & SDRAX Strategy Returns: Q4 2018 (per above):
GATEX & SDRAX Strategy Returns: 12 months ending 6/28/19 (per above):
WENNCO DOWNSHIFT ETF STRATEGY
3 LARGEST S&P 500 RISK-OFF MONTHS SINCE INCEPTION: OCT & DEC. 2018 & MAY 2019
Source: Bloomberg & Schwab
1) OCTOBER 2018: S&P 500 TOTAL RETURN: (-6.84%). DOWNSHIFT ETF: (-1.65%) = 24% downside capture
2) DECEMBER 2018: S&P 500 TOTAL RETURN: (-9.03%). DOWNSHIFT ETF: (-4.12%) = 46% downside capture
3) MAY 2019: S&P 500 TOTAL RETURN: (-6.35%). DOWNSHIFT ETF: (-2.04%) = 32% downside capture
Downshift ETF is available to invest on Schwab’s Marketplace Platform. Our latest 2-pgr can be found here:
PLEASE EMAIL ME FOR OUR LATEST DECK (firstname.lastname@example.org)
Why Downshift? Owning uncorrelated return streams is important to preserving wealth, and especially makes sense in late in market cycles (like where we are today). Bonds have become less uncorrelated to equities, and investors need more reliable sources of protection in risk-off markets. Our strategy has two parts which are negatively correlated: long-dated and actively managed S&P put options and actively managed covered calls. Owning both market beta (direct correlation to the S&P), along with uncorrelated return sources, is a prudent way to grow assets over time. Downshift ETF seeks to minimize drawdowns and maximize compounding returns over the long term.
Nolan (our 3 month old)
Source: iPhone Camera
Along with Nolan, I hope everyone has a great July. Stay nimble (and cool) out there.
CIO & Head Trader
Wennco Downshift Strategies