Bull|Bear Radio

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%. 

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%.

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.

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.

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.

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.