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Earnings Season Wrap: Mixed Bag Results Could Spook Investors

by WBI Insights
written by WBI Insights

It’s earnings season and we are going to unpack initial third quarter results. The markets and economy went right along with the theme of Halloween and produced some spooky stats. An ease in geopolitical tensions and trade resolution could breathe life back into the markets. Will it happen?

Earnings Wrap

According to FactSet (as of 10/25/19), 40% of companies reported and 80% beat estimates. The trend isn’t all bad, but the problem is that analyst experts have really reduced estimates so low that everybody is beating them these days. Therefore, it’s kind of an engineered result. Further, blended earnings projections for this quarter point to a -3.7% decline for the quarter. Should this result come to fruition, it would mark the first time the S&P 500 Index has reported three straight quarters of year-over-year declines since 2015 and 2016. All the estimates have been pointing to negative territory, but so far, we haven’t hit any of the estimates. The economy seems to be holding up better than what the populous rhetoric has been indicating. As of October 31, there was a 1.9% GDP print for the third quarter. This beat the 1.6% GDP estimate and is a slight decline from Q2’s 2%, which doesn’t allude to a striking slowdown. Revenue growth for the S&P 500 for the third quarter is at 2.8%, which is not actually growth—it’s the lowest growth rate since Q2 of 2016. Coupling this statistic with the earnings growth rate of -3.7% for the third quarter gets a bit spooky and shows further earnings decline.

Brexit or Not to Brexit

Brexit is still looming large over England and the world. Boris Johnson, the Prime Minister, has definitely got his hands full in trying to pull off Brexit. Seems the news last week about Johnson’s approach with Parliament yielded a standoff of sorts with another extension placed on the Brexit decision. The UK has another election in December even though Johnson was just appointed. The confusion is very much affecting their economy and tends to have an overhang effect throughout the world. This could all end with a possible referendum vote against Brexit and it might all go away. Too early to tell if investors get spooked on the Brexit yay or nay referendum vote.

China Trade Deal

The trade deal with China still hangs in the balance. Yesterday, China set its mark for signing an interim trade deal – drop the tariffs (Bloomberg, 11/5/2019). In more detail, Beijing asked the Trump administration to eliminate the duty imposed in September on over $110 billion worth of goods, vow not to impose any new tariffs, and a rollback in the tariffs already forced. According to the Commerce Department data for September, U.S. imports for China fell 4.9% over the prior month, which is the lowest in more than three years. The duty placed on goods is the Trump administration’s way of trying make sure China upholds their part of the goals of the Trade Deal, 1) resume purchase of American farm goods and 2) to crack down on intellectual property theft. For now, the standoff remains steady in the Trade War.

Overnight Repo Infusion

Recently the Fed has been doing some overnight operations in the repo market by ramping up the amount of temporary liquidity injections it provides to the lending markets to a sum of $120 billion. This is up from what is normally around $75 billion a night. The Fed also announced that it will target $60 billion a month in bond purchases. This all in lieu of enacting another formal quantitative easing program that was present during the Financial Crisis. However, the spooky news here is that these numbers of liquidity infusion and bond buyback targets are reminiscent of the Financial Crisis.

One Possible Fix

For years, my opinion has remained that fiscal stimulus could be the fix we need. Massive government spending through fiscal stimulus is a long-term way to breathe life back into the economic system. Central bankers and Chairman Powell himself have said the effects of quantitative easing have run their course. Building infrastructure through these shovel-ready programs is a permanent form of capital that tends to add velocity to the economy. The main hold up among the Fed and central bankers is the notion that expansion in deficits through this medium is a bad thing, yet they’re willing to dump $120 billion into the overnight repo market. The scary thing is no one really seems to know what to do about the financial system being under such duress.

Hopefully the spookiest news went out with Halloween and we can look forward to the holidays with a newfound breath of crisp fresh air.

Important Information

Past performance does not guarantee future results. The views presented are those of Matt Schreiber or Don Schreiber, Jr., and should not be construed as investment advice. Matt Schreiber, Don Schreiber, Jr., or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Impeachment and Political Harangue Causing Unrest for Investors

by WBI Insights
written by WBI Insights

By Matt Schreiber– WBI President and Chief Investment Strategist

 Impeachment proceedings have begun against President Trump and this is causing unrest for market participants. The recent whistleblower complaint was at the center of the controversy and outlined allegations that Trump elicited the help of the Ukrainian President against a political foe for the 2020 election. The House is moving towards impeachment with six different committees and ongoing investigations. With the announcement of the proceedings last week, the market was down on Friday, September 27th as we recorded our eightieth episode of our financial podcast, Bull|Bear Radio. It seemed as if investors developed a case of impeachment indigestion. 

Though impeachment proceedings were at the forefront of the news last week, there were also other elements of political harangue that could have upset the markets. The latest US-China trade war news suggests a change in mood when it comes to trade talks. China’s trade negotiators canceled their trip to the Midwest, which was an attempt to renew the purchase of soybeans and pork. However, China has been buying more agricultural goods and meat products, which is a good sign for trade. On another positive note, Nike’s revenue climbed to 22% in China. This may indicate that China has less of an impact on supply chain than previously thought. If Nike made it through fairly unscathed, perhaps the effect on corporate America’s bottom line isn’t as dire of a story?

In other trade news, President Trump and Japanese Prime Minister Shinzo Abe signed a limited trade deal to eliminate tariffs and expand market access on farm, industrial, and digital products. The fact that this could potentially pass through Congress is a step in the right direction for trade, but political support and collaboration is crucial to keep positive momentum otherwise DoubleLine Capital CEO Jeffrey Gundlach may be right when he said there is a 75% chance of recession before the next election. 

Stocks were on one of the longest streaks without outsize moves before last week’s decline and the political unrest that emerged. However, when looking at the Atlanta Fed GDP tracker, we can see the latest GDP forecast is about 2.1% as of September 27, 2019. With this being the second quarter of the year, which typically isn’t the highest for GDP, if we can get back towards the 3% range this could help firm the economy. 

We’ve had political turmoil for a bit of time now, but with the recent additional political uncertainty, this could taint certain economic inputs. The Federal Reserve Bank of New York had to step in and provide liquidity in the Repo market, which is a bit unnerving. The economy is in need of capital spending, trade resolutions, and a rest in political tensions. Fundamentals are starting to matter, it’s time we start paying close attention to all elements and factors influencing the markets. 

Important Information

Past performance does not guarantee future results. The views presented are those of Matt Schreiber and should not be construed as investment advice. Matt Schreiber or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Is A Recession Near? 9 Mixed Signals the Economy is Giving

by WBI Insights
written by WBI Insights

By Don Schreiber, Jr.– WBI Founder and CEO

The biggest question on the minds of market participants lately has been “is a recession near?” The economy is giving us mixed signals as investors anticipate the fate of the long-running bull market. While many investors are left wondering if a recession is near, we can’t help but survey the latest economic signals. Experts say there is a 35% chance of a nearing recession over the next 12 months, which is up from 15% a year earlier. So what exactly are the mixed signals the market is giving?

Here’s a list of economic conditions indicating positive sentiment (bull market extension) or negative sentiment (recession).

  1. (Positive) We are at 50-Year lows when it comes to jobless claims. Companies have had an increase in layoffs and more citizens are applying for unemployment.
  2. (Positive) Consumer spending started the year sluggish and has bounced back. Credit conditions are improving and interest rates are declining. 
  3. (Negative) The housing market has been soft over the past several months. There has been a shortage of affordable houses for consumers, new home sales have dropped over the last year.
  4. (Negative) U.S. factory orders for business equipment have gone on a downward trend over the last couple of years.
  5. (Negative) Global growth outside of the U.S. is slowing, we’re seeing recession trends all over the globe. We need fiscal stimulus across the globe, companies have stopped spending money.
  6. (Positive) U.S. President, Donald Trump, is looking to refinance U.S. debt in an effort to drop interest rates down to zero and propel fiscal stimulus. 
  7. (Positive) U.S retail sales advanced 0.2% more than expected in August. Consumer spending accounts for about 70% of the economy. 
  8. (Negative) The three-month and 10-year yield curves have been inverted over the last few months. Inverted yield curves have often been a sign that a recession is near. Inverted yield curves are one of the most closely watched indicators by economists. 
  9. (Negative) Economic activity in the manufacturing sector contracted in August. Though manufacturing does not make up a significant portion of the economy, manufacturing influences consumer spending and jobs. 

Though there seem to be recession trends surrounding the markets, there are also some areas of strength. Though the yield curve has inverted, housing and manufacturing have slowed, and global growth is slowing, there are still some signs of hope for the markets. With the American consumer spending, low-interest rates, and high retail sales, perhaps the consumer can help support the market for a bit longer. Should consumers fear that a recession is near? We believe it is certainly an area of concern, but taking all of these mixed signals into consideration, we can’t say for certain that a recession is right around the corner. 

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Housing Market Slowdown: Signal the Bull is About to Go?

by WBI Insights
written by WBI Insights

By Don Schreiber, Jr.– WBI Founder and CEO

Did you know that 70% of the U.S. economy is driven by consumer spending? This is why it is crucial that the consumer has money to spend. Lower interest rates tend to help consumers  borrow and spend more money. If you have lower interest rates on mortgages, you have a lower mortgage payment so you can spend more money on other things. But with recent market volatility, and rumors of the “R” word lingering (recession), the housing market slowdown may be a signal that consumers aren’t responding to low interest rates as expected. 

As you can see from the chart below, new and existing home sales in New York City, Jersey City, and White Plains had both dropped like a rock over the spring and summer selling season of 2018. Historically, home buying and selling activities swell during the spring and summer months of the year, and trail off during the fall and winter.  Although we’ve had very low interest rates, even now the houses don’t seem to be selling. What gives?

housing markets
Source: Bloomberg as of 8/23/19. Data provided through 5/31/18. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly. MNHSNJWP Index represents median new home sales in New Jersey and White Plains. The MEHSNJWP Index represents median existing home sales in New Jersey and White Plains. 

It appears consumers aren’t buying and selling in real estate as they once were. Could this be the aftermath of the state and local taxes (SALT) deduction cap? I believe real estate is a victim of bad tax policy, which was originally associated as part of the Trump tax cuts that went into effect in 2018. Lawmakers aimed to cut high business tax rates, but also had to limit the deductions for state and local property taxes and mortgage interest rates. This has an outsized impact on high property value areas such as the Northeast. From a real estate standpoint, New York, New Jersey, and Connecticut are some of the hardest-hit states. 

What does a lack of new and existing home sales mean for the markets? Typically, investors watch the housing market as a leading indicator of what is going on in the economy. If housing is growing and doing well, the general stigma is that the economy should follow suit. The real estate market will tell us if people are actually buying and spending money on homes or if they’re holding their money. Although interest rates have decreased to 3.6% for a 30-year fixed rate, housing across the board is slow. Builders and other folks on the housing side of the business seem to be struggling as well. If there is no demand, there is nothing to build, and no money to be made. 

With recent market volatility, investors need to know when to hold ‘em and know when to fold ‘em, as the popular song goes. I’m watching the housing market closely because I believe it could be an indicator of that dreaded “R” word. 

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Negative Interest Rates: Too Good to Be True?

by Steven Van Solkema, CFA
written by Steven Van Solkema, CFA

By Steven Van Solkema– WBI Chief Investment Officer

We know how the saying goes; sometimes, things are “too good to be true.” Is this the case with negative interest rates? WBI CEO Don Schreiber recently said negative interest rates look “like an absolute disaster from a financial system standpoint.” That’s because when a central bank targets interest rates with a negative value, lower than zero percent, this can be a strong signal of recession. 

Let’s put this into perspective, say a borrower takes out a $10,000 loan at an annualized 3% interest rate, at the end of the year the borrower would have to pay back the $10,000 plus $300 in interest. With negative interest rates, the borrower would take out a $10,000 loan at an annualized -3% interest rate, meaning the bank pays the borrower $300 after a year. We’ve seen this happen before, once during the Eurozone crisis and again during the 2008 subprime mortgage crisis. In both of these instances, the interest rates were brought down to near zero.

This sounds ideal for the consumer, but what is in it for the lenders? This is an incentive for banks to lend money more freely and for individuals to have the ability to invest and spend their money. In some senses, upholding negative interest rates can be the final effort to boost the economy and spur growth. If interest rates are low, consumers may likely opt to borrow or take out larger loans to aid in purchases, which leads to increased consumer spending. 

When the markets look grim, investors don’t want to take the risk of losing their capital. The banks want to entice the borrowers to spend their cash as opposed to holding onto it. Central banks may charge a fee to commercial banks for individuals who opt to hold onto their money and make deposits. Banks would prefer not to be charged a fee so they desire lending at a negative interest rate over paying a fee to hold cash. 

Within the latest episode of Bull|Bear Radio, WBI CEO Don Schreiber, Jr. and I discussed a Danish bank that recently implemented this policy. They’re willing to give investors a 30-year mortgage at a negative interest rate. It’s hard to believe that a bank would pay the consumer to take their money.

All in all, negative interest rates are an act of pure desperation. Negative interest rates harvest the potential to weaken a nation’s currency, which can bolster exports and trading. The bottom line is, negative interest rates increase inflation and bolster consumer spending. While much of this sounds good, it’s been difficult for participants to quantify the effects of implementing negative interest rates. If commercial banks charge a fee for customers to keep their cash in the bank, the customer may likely withdraw their cash. If the banks absorbed the cost, profit could be severely cut into. This will do the opposite of what negative interest rates were created to do, allow the free flow of monetary exchanges between banks and the consumers.  

It’s similar in the bond market. When bond rates are negative, the creditor pays the issuer the additional interest with the understanding that they will receive the principal at the end of the term.

Let’s put this into perspective, say a borrower takes out a $10,000 loan at an annualized 3% interest rate, at the end of the year the borrower would have to pay back the $10,000 plus $300 in interest. With negative interest rates, the borrower would take out a $10,000 loan at an annualized -3% interest rate, meaning the bank pays the borrower $300 after a year. We’ve seen this happen before, once during the Eurozone crisis and again during the 2008 subprime mortgage crisis. In both of these instances, the interest rates were brought down to near zero.

This sounds ideal for the consumer, but what is in it for the lenders? This is an incentive for banks to lend money more freely and for individuals to have the ability to invest and spend their money. In some senses, upholding negative interest rates can be the final effort to boost the economy and spur growth. If interest rates are low, consumers may likely opt to borrow or take out larger loans to aid in purchases, which leads to increased consumer spending. 

When the markets look grim, investors don’t want to take the risk of losing their capital. The banks want to entice the borrowers to spend their cash as opposed to holding onto it. Central banks may charge a fee to commercial banks for individuals who opt to hold onto their money and make deposits. Banks would prefer not to be charged a fee so they desire to lend at a negative interest rate overpaying a fee to hold cash. 

Within the latest episode of Bull|Bear Radio, WBI CEO Don Schreiber, Jr. and I discussed a Danish bank that recently implemented this policy. They’re willing to give investors a 30-year mortgage at a negative interest rate. It’s hard to believe that a bank would pay the consumer to take their money.

 All in all, negative interest rates are an act of pure desperation. Negative interest rates harvest the potential to weaken a nation’s currency, which can bolster exports and trading. The bottom line is, negative interest rates increase inflation and bolster consumer spending. While much of this sounds good, it’s been difficult for participants to quantify the effects of implementing negative interest rates. If commercial banks charge a fee for customers to keep their cash in the bank, the customer may likely withdraw their cash. If the banks absorbed the cost, profit could be severely cut into. This will do the opposite of what negative interest rates were created to do, allow the free flow of monetary exchanges between banks and the consumers.  

Important Information

Past performance does not guarantee future results. The views presented are those of Steven Van Solkema and should not be construed as investment advice. Steven Van Solkema or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Market Mess: Can We Clean Up this Market?

by Steven Van Solkema, CFA
written by Steven Van Solkema, CFA

By Steven Van Solkema– WBI Chief Investment Officer

August is typically a relaxed time for market participants…not this year. The market is a mess, just last week the S&P 500 and the NASDAQ indexes experienced their worst drops since December 21. Though market participants were pleased to learn that Federal Reserve Chairman Powell initiated a 25 basis point cut on July 31, the market didn’t seem to respond as exceptionally as one would have hoped. It seems this cut was not dovish enough for market participants because this was something they expected. The market sold off in conjunction with the rate cut announcement, then the market came back a bit, but soon another announcement would upset the markets. We may still need the Fed to grab their brooms and clean up this shattering market. Investors are looking for a further reduction of rates, indicating the good news was not good enough.

To top it all off, President Trump announced on the following Thursday that the U.S. is going to tax the remaining imports from China by 10%, which led to a larger market mess. Market volatility is back, and reaction to the tariff announcement essentially wiped out June’s market gains. People are calling this a mid-cycle adjustment, which is reminiscent of the 1990s mid-cycle rate cuts when the Fed cut multiple times in 1995 and 1998. In those years, three cuts transpired over several months. Initial rates were higher than they are today, which is why the Fed had the flexibility to reduce rates over multiple months. In market terms, this signaled the beginning of the end. 

So are today’s events aligning with the markets in the 1990s or is this a different scenario? At the moment, I don’t feel these align and I don’t believe the Fed does either. The Fed recognized demand for a rate cut and realized this was the sweep the markets needed. We have a 75% chance of another 25 basis point cut in September. 

By the same token, Powell made it clear that this is not the beginning of an easing cycle. We seem to be in the later stages of a market mess and the Fed may be able to squeeze out excess return and keep this party going for a bit longer. 

With earnings season at a close, the only thing polishing the markets last week were corporate buybacks. If companies didn’t come to the rescue and buy stocks back, we could have seen a much bigger market mess. If we continue to see any weakness in stock prices, corporate buybacks will likely continue. 

Coupled with the “Fear of Missing Out,” participants believe that the Fed is going to cut rates again, which makes them want to run with the market. Could the Fed engineer a continued bull market? It is possible, but I think we are going to see a lot more volatility going into the fall season. As market participants, if we solely rely on Fed policy, corporate buybacks, and “Fear of Missing Out” trades, this bull market is going to be short-lived. They say beginnings are always messy, but in this case, the end may be messy too. 

Important Information

Past performance does not guarantee future results. The views presented are those of Steven Van Solkema and should not be construed as investment advice. Steven Van Solkema or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Earnings Season Indicates Trouble, but Opinion Remains of a Strong Economy

by Don Schreiber, Jr.
written by Don Schreiber, Jr.

By Don Schreiber, Jr.– WBI Founder and CEO

Earnings season is here, and so far, earnings are looking a bit barren. Although, perhaps a bit better than you would expect so far. 

S&P 500 Earnings Kick-Off

Just last week, we published our 2019 Mid-Year Review and Outlook. Indications were pointing to businesses looking very nervous about their ability to beat expectations. We forecasted that the potential for a brutal earnings season looms large. Further, seventy-seven percent of companies that issued earnings-per-share guidance ahead of publishing financial results warned their upcoming numbers would fall short of Wall Street estimates. And according to FactSet, this guidance equates to the second-worst quarter on record going back to 2006.

According to Bloomberg as of 7/19/19, 77 companies have reported earnings in the S&P 500 so far, with earnings growth of 2.1% and revenue growth of 2.6%. Although this is a bit low, I’m hopeful seeing any earnings growth at all this earnings season. Revenue growth keeps getting cut, but market participants think the economy is strong. In my opinion, I wouldn’t be hurling money into some of these sectors. I also feel that the large companies who report early tend to have better performance than the rest of the group. The numbers within the first week of reporting tend to be a little bit stronger than the rest of the reporting cycle. If that holds true this time, I would suggest that the negative earnings expectations that analysts have had are well justified.

Source: Bloomberg as of 7/19/19. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly.

Russell 2000 Earnings Kick-Off

According to Bloomberg, as of 7/19/19, 109 companies have reported earnings in the Russell 2000 Index, with earnings growth of 2.04% and revenue growth of 2.32%. It’s too early to tell if the small and mid-cap companies will end up in positive earnings territory. The fact that Information Technology has dropped is not a favorable sign because that has generally been a fast growth area. I believe we can credit this drop to the terrible tariffs imposed by the Trump Administration. Smaller companies do not have enough flexibility in their consumer base and revenue stream to be able to offset tariffs.

Source: Bloomberg as of 7/19/19. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly.

We’re seeing a weakening in business conditions, and a GDP that is not as robust as folks would try to make us believe on both the central bank side and on the political front. The real story is probably a little bit less rosy than the massaged story. In considering these factors, it’s difficult to tell just where earnings and revenue may end up this quarter. Will market participants be left out to dry by the Fed? Only time will tell.

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

Russell 2000 TR Index: measures the performance of 2,000 small-cap U.S. companies where dividends are reinvested automatically. S&P 500 TR Index: includes a representative sample of large-cap U.S. companies in leading industries where all cash payouts (dividends) are reinvested automatically.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Is the Market in Late-Stage Terminal Illness?

by WBI Insights
written by WBI Insights

By Matt Schreiber – WBI President and Chief Investment Strategist

While reviewing recent Russell 2000 Index and S&P 500 Index performance, we’re seeing similarities to the markets in 1998 and 1999. In 1998, the Russell 2000 Index decoupled from the S&P 500 Index. Usually, large-cap stocks and SMID stocks perform in tandem. However, there are times when they start to perform in different directions, which could be a signal of market changes to come. At the beginning of a bull market cycle, Russell 2000 stocks typically have higher earnings and revenue for a select period of time because of the growth aspects the index holds compared to large-cap stocks. However, towards the end of the cycle, the S&P 500 Index tends to outperform.

It seems as if the writing on the wall is becoming clearer. As you can see in the chart below, from July of 1998 to July of 1999, the Russell 2000 Index posted a negative return of 0.18%. Over the same time period, the S&P 500 posted staggering returns of about 21%. 

Source: Bloomberg as of 7/3/19. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly.

Now, if we look at the same timeframe 20 years later, we can see the similarities to ’98 and ’99. The Russell 2000 Index was down 5.31% and the S&P 500 Index was up 10.4%.

Source: Bloomberg as of 7/3/19. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly.

We can see that the spread is nearly identical to that of the chart from 1998 and 1999. Is this signaling that the market has a late-stage terminal illness? This could be a warning sign that this bull market cycle may be ending soon. Under normal circumstances, without the Fed and central bankers around the world intervening, you may have a similar risk factor to 1998 and 1999. This is a harbinger of significant risk and investors can’t afford to catch the market illness which could deteriorate their capital.

Important Information

Past performance does not guarantee future results. The views presented are those of Matt Schreiber and should not be construed as investment advice. Matt Schreiber or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

Russell 2000 TR Index: measures the performance of 2,000 small-cap U.S. companies where dividends are reinvested automatically. S&P 500 TR Index: includes a representative sample of large-cap U.S. companies in leading industries where all cash payouts (dividends) are reinvested automatically.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

The Writing on the Wall for Yield Hungry Investors

by WBI Insights
written by WBI Insights

By Steven Van Solkema – WBI CIO

I believe the most predictive sign of a recession is an inversion in the 3-month and 10-year yields — the 3-month on the short end because that is the market’s reaction to the Fed, and what monetary policy is doing. With the ongoing worriment revolving around the Fed and trade talks, no wonder the yield curve has been inverted since May.

When the 3-month and the 10-year yield curve is inverted, this means that expectations of the future are lower. People are demanding more rate of return for what we have in current conditions. Essentially, the yield curve is signaling a softness and slowness in the underlying economy, which similarly has led to the last seven economic slowdowns. This doesn’t mean that a recession happens tomorrow, typically, there is a gap between a yield curve inversion and a recession. It could span the length of 90 days or even a year. Though with the yield curve inverted since May and stocks still high, I’m starting to have déjà vu.

What is underlying the market now is leaving me with an eerie feeling reminiscent  of a pre-crisis market. I have experienced much of the market turmoil over the past couple of decades. In 2007, I predominately focused on fixed-income and mortgage-backed securities and witnessed market participants buying up the stock market even though market conditions suggested a flight-to-quality movement. Yield hungry investors were still buying into stocks even though flight-to-quality would suggest investors move their capital away from riskier investments to safer ones.

If we had seen a lowering on the short end of the yield curve, and rates were declining on the short end in anticipation of a rate cut, that would be a different story. The entire yield curve has essentially shifted down, and I believe this is quite ominous. People are hungry for yield in a low interest rate environment. Investors have obtained collateralized loan obligations, a securitized form of loans in which companies acquire individual loans on their own and have the banks tranche them into different pieces of risk. This reminds me of the mortgage-backed crisis of 2007-2010. There is currently about $1.3 trillion in this market, and it has increased at a significant rate. Again, this is eerily reminiscent and a bit unsettling. 

I believe investors should temper their fear of missing out at the moment. It’s important to be cautious because the market is not making it easy for investors now. We’re either going to be trading sideways or in a very volatile situation. I would suggest that investors go for active management, and a bit of diversification in their portfolios. It’s important to look for investment opportunities that can help protect capital and as well as diversify assets. When the writing on the wall is starting to look bad, they need to know how to get out of the market quickly. 

Important Information

Past performance does not guarantee future results. The views presented are those of Steven Van Solkema and should not be construed as investment advice. Steven Van Solkema or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

Powell Put Accounts for Half the Return This Year

by WBI Insights
written by WBI Insights

Another Powell Put is out, and his June 4 comments seem to indicate that a summer rate cut is on the table for the next FOMC meeting.

According to an article by Bianco Research on June 5, 2019, Federal Reserve Chairman Jerome Powell’s statements have significantly impacted market gains.

  • January 4, 2019: “And particularly with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves. But we’re always prepared to shift the stance of policy and to shift it significantly if necessary in order to promote our statutory goals of the maximum implement and stable prices.”
  • June 4, 2019: “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Powell Puts Are Half This Year's Gains

Comparing the gains on January 4 and June 4 to the rest of the year
IndexS&P 500Dow JonesNASDAQ
Source: Bianco Research
January 4 Point Gain (Powell Put 1)84.05746.94275.35
June 4 Point Gain (Powell Put 2)58.82512.40194.10
Powell Put Days Only Point Gains142.871,259.34469.45
Year-to-Date Point Gains296.422,004.72891.84
% Powell Put Days to YTD Gains48.20%62.82%52.64%
Year-to-Date Percentage Gains11.82%8.59%13.44%
Powell Puts Days Only Percentage Gains5.70%5.40%7.08%

Who saw that coming? Well, we did.

If you are a frequent listener of the Bull|Bear Radio podcast, you would have heard WBI’s experts Matt Schreiber and Don Schreiber, Jr. talking about their hunch on an impending rate cut. Here’s a recap for those who missed it:

REACTIONS TO JANUARY POWELL PUT: 

Ep 57 – Jan 12, 2019

Don: I think the Fed has made a big policy error in raising rates eight times. Economic growth has been really anemic, the economy isn’t growing fast enough to absorb these rate hikes. We have a 900% rate hike so far in this rate hike cycle from 0.25% interest rate on the Fed funds to 2.5%. The interest rate hike cycle that caused the Financial Crisis was up 425%, and up only 117% before the Dot-Com crash. So the Fed is way out over their skis with a 900% increase in interest rates and I think that’s the major problem. At the same time, they have balance sheets that they’re adjusting, which puts more pressure on interest rates and liquidity.

Here’s what the good news is. I think the Fed’s done, and by the end of 2019, I think they’re cutting rates. And I think that the Powell put goes on steroids because we’ll have easing instead of tightening, and so markets towards the end of the year, seeing that this is coming, could really rocket.

Ep 58 – Jan 17, 2019

Don: There is pretty persuasive evidence in the weakening data sets, both globally and domestically, that are significant causes for concern, because risk of rising markets is increasing. I think the Fed will actually continue to moderate their stance and say, “Interest hikes are over right now, folks.” Maybe they’ll have to cut rates, then markets might trend higher.

ANTICIPATION OF POWELL’S JUNE PUT:

Ep 72 – May 31, 2019

Don: Right now the market is looking for a hero, a savior.

Matt: His name may be Jerome.

Don: Powell?

Matt: Yes, that guy.

Don: Fed chairman?

Matt: Yeah, he swoops in like Iron Man and starts lowering rates. It’s a complete possibility.

Don. Hey, it could happen, the bond market is already pushing rates lower. You may have noticed the headlines. Rates are just collapsing, which is an implied easing in the system and the Fed typically will follow the market and may have to cut rates long before they were planning to. That’s what’s going on. And you know the inverted yield curve is going to be weighing on the Fed decision-making on whether or not they actually should cut rates here.

The June FOMC meeting is happening on the 19th, will you be listening?

Source: “The Powell Put Was Exercised Yesterday.” Bianco Research, 5 June 2019, http://www.biancoresearch.com/the-powell-put-was-exercised-yesterday/.

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. or Matt Schreiber and should not be construed as investment advice. Don Schreiber, Jr., Matt Schreiber,  or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

May Meltdown: The Markets May Need Saving

by WBI Insights
written by WBI Insights

By Don Schreiber, Jr. – WBI Founder and CEO

The markets are in the midst of a May meltdown and investors should grab their life vests before their portfolios drown. As you can see from the returns below, the markets are in need of a bit of saving.

Source: Morningstar. Daily, total return as of 5/31/2019.

Investors should be keeping a close eye on the following:

  • Bad politics which drive the market lower. 
    • The trials and tribulations of Trump policy are starting to weigh on the markets. Congress is currently a toxic cesspool with members seeking to destabilize Trump’s presidency through probes and investigations. Quite frankly, I’m tired of the absurdity brought forth by members of Congress and wish they would focus on policy. 
    • The U.S. has a clear Infrastructure crisis and the cost of failing to address America’s infrastructure issues is high. The Democrats have put the infrastructure crisis on hold in order to position for the 2020 election. I’m hopeful that our president and his cabinet will embrace a path toward better infrastructure before our economy slides further toward recession, but voters can make a difference too. Votes will never count more than in upcoming elections.
    • The Brexit debacle has been looming for quite some time now, and the U.K.’s exit date has been delayed until October 31, 2019. The effect of Brexit on financial markets could be as profound as the act of Brexit itself. 
  • Trade Deal with China
    • I have to ask myself if a resurgence of the Cold War is brewing with China. There is no likely trade deal until June 29th when President Trump and President Xi Jinping meet at the G20 Summit. Could the leaders of the two superpowers of the world step up and avoid creating a disaster of their own making? I sincerely hope they do because I believe the trade war has the potential to push global economies into recession.
  • Soft GDP and Consumer Spending
    • The latest GDP forecast was looking weak with a forecast of just over 1%. A quarter ago, the Atlanta Fed was forecasting 3.5% GDP. With the huge dispersion, consumers will begin to be wary. This seems to be having a direct impact on consumer spending, which shows retail sales beginning to fade. Consumer spending drives 70% of U.S. GDP, so withering trends in consumer spending will circle back to affect a downward GDP trend. 
  • Inverted Yield Curve and Interest Rates
    • Markets are continuing to sell off and we have inverted yield curves all over the place. Past research has shown that inverted yield curves tend to predict recessions. The inverted yield curve could also weigh on the Fed’s decision to cut interest rates. If the Fed follows the markets, they may have to cut rates long before they intended to.

Overall, there are a lot of unanswered questions that are overhanging the markets. One of my favorite movies is Hope Floats, and I’m hoping that is exactly what the markets do. If we get a trade resolution along with interest rate cuts, this could offset the damage potential the earnings cycle, soft GDP, inverted yield curve, and Brexit could have on the markets. 

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Bull|Bear Radio Blog

No Earnings, No Problem

by WBI Insights
written by WBI Insights

By Don Schreiber, Jr. – WBI Founder and CEO

Does the market want to party like it’s 1999? 2019 is looking eerily similar to the market in 1999 and investors are having déjà vu all over again. First quarter returns in 2019 are reminiscent to the returns captured 20 years ago. Let’s start with the Big Growers’ Composite, which consists of the top 75 stocks with the best growth credentials. According to Empirical Research Partners, the top 75 stocks in the composite have an 85% Price-to-Earnings (P/E) Premium compared to the rest of the large-cap composite. In fact, they are almost two-to-one. The price for the top 20% large-capitalization stocks based on their factors, meaning these are the companies that have the highest quality trends right now, is turning negative. The worst quintile stocks, or lowest 20%, are experiencing price appreciation. To put this in simpler terms, the stocks that have good cash flow are the ones that have negative returns from a price standpoint. The stocks within the worst quintile of the same select factors are up about 30%. This looks identical to what happened in 1998 through March of 2000.

If we look at forward PE ratios by sector, we can see that the most overvalued stock sectors at the moment are Software & Services and Retail, Media & Consumer Services. When comparing these sectors to the most overvalued sectors in 1999 we can see that the same sectors were overvalued with a P/E multiple average of about 40 times that of earnings. In this case, having no earnings appears to be no problem for investors. The stock of the companies that are making the money is dropping, and the stock of the companies making no money are soaring through the roof. If the market continues partying like it is 1999, could we see a resurgence of the New Economic Era? We’re not counting the market out yet, but we will have to stay tuned to see if investors will stay at the party or turn the lights out early.

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

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