First Quarter 2019 Client Newsletter

Speed vs. Velocity

                Maverick and his wingman Goose are walking the tarmac - - Maverick turns to Goose and they jointly proclaim that they have ‘The Need… The Need for Speed.’

This iconic scene from the 1986 film Top Gun seemingly has it all: unified buddies in military garb, a lead-in for an epic mock-combat scene and of course, a memorable rhyme.  Yet it does leave out one bit of information… Where are they going?  

A high school physics instructor might point out that speed is important, but it doesn’t communicate the whole story:

• Speed tells you how much distance you can cover per unit time (miles per hour, for example).   Speed is a great way to quantify movement.
• Velocity on the other hand combines speed with a vector (Up/Down or North/South/East/West etc.).   Velocity tells you how fast you’re moving and in what direction.

In markets, the distinction between movement and direction is fundamental to understanding ‘where’ you are.  Movement is measured in dollars per share or percentage points, it also tends to be noisy and short term (hourly, daily, and weekly).  In finance, direction combines the up/down vector with the movement/speed parameter over longer periods of time (years and decades)

Simply put, direction is the positive or negative trend in a market, security, or financial plan.  

Technical Summary

Over the last 18 months, markets have gone nowhere.  And just as you’d guess, they’ve done so with astonishing speed. 

 

Calendar year 2018 endured a half-dozen 3-5% declines and two pullbacks of 8-10% before the -20% tumble in the 4th quarter.  The first quarter of 2019 has recouped all the previous year’s losses and completed the round trip.  The current price level in the S&P was observed in January, August, September, and October of 2018.

This is not the first time we’ve managed through a multi-year market consolidation.  In fact, since the bull market began in 2009, there have been 2 similar consolidations that all resolved higher.   Each subsequent upward trending period (2013-2014 and 2017) was associated with a major positive shift in the fundamental landscape.  

In our opinion, there are still several fundamental factors that need to be resolved before the next major uptrend begins.

Fundamental Summary

Rapid shifts in sentiment over the past 18 months have been centered around combinations of: slowing/accelerating global growth, restrictive/accommodative monetary policy, and protectionist/globalist trade policies.  A few thoughts on the current positioning of these themes:

• Feelings about global growth vary greatly, but the underlying trends are still lackluster, especially outside of the United States.  
• Monetary policy is unquestionably accommodative on a global scale.  
• The US trade policy posture towards China, Europe and Canada/Mexico is very much in flux.   We should have renewed policy direction on: China by the end of this week, Eurozone by May 18th, and Mexico/Canada by the end of the year.

In short, we view the current fundamental situation as stable, but vulnerable - especially when it comes to unresolved protectionist trade policies.

We will provide a more in-depth fundamental review in upcoming market updates.  If you would like to go deeper in the interim, we’ll be happy to set up one-on-one presentations.

Conclusion

Throughout last year, we discussed the notion that the market may be in for a prolonged period of consolidation in an otherwise healthy bull market.  While corporate earnings and economic growth slowed significantly in the fourth quarter of 2018, there are few signs of imminent recession in the United States.  

If the odds of recession remain low, we will stick to our thesis that the market is still in the process of digesting the gains of 2017.  Further aggravation on the trade front and/or a continued deceleration in global growth are the major risks.  Conversely, stabilization on these issues could provide the fuel to resume the uptrend that began nearly a decade ago.  

As 2019 progresses, we will continue to monitor the noise and movement in order to keep your account(s) moving in the right direction.  If you have any questions or concerns, please let us know.