March Madness is coming to a close. We have completed a remarkable quarter as the S&P 500 rallied from its December 24, 2018 short term low of 2416 to its present 2828 level recording an approximate 17% gain. Over the course of the last 30 years we have had only 4 Federal Reserve Chairmen which include Greenspan, Bernanke, Yellen and Powell who was appointed last year.
Normalizing Interest Rates. Chairman Powell’s initial task was to begin unwinding US Treasury assets purchased in the past 10 years in the Open Market to accommodate economic growth. Current assets held on the Federal Reserve balance sheet stands at $3.7 trillion which is down from $4.7 trillion two years ago dropping the monetary base by $500 billion. Much of the easy money has evaporated as a result.
American Economy on a Diet. Powell has reduced money supply growth from 8-9% to its present 4% level. In November 2018 after the financial markets tanked after Labor Day, Powell indicated no more asset sales until evidence appeared that the economy was overheating. Henceforth, the US stock market has rallied over the past 95 days. If money growth does not rebound in a significant percentage, the S&P 500 is approaching levels which are not sustainable.
Bonds Sending Mixed Signals. The US Treasury market has provided some excitement since yields reached a short term peak in November 2018. Interestingly, the short end of the curve is higher than five year maturities. The mini inverted curve certainly reflects a modest money supply growth with many analysts anticipating a recession.
Cyclical Crossroad. We are waiting on some signal from Chairman Powell. By lowering short-term rates, he would signal that the economy should continue to enjoy prosperity. If he chooses to either raise rates are stay at status quo, then the financial markets will weaken. Previous new Fed Chairmen have stumbled within the first year taking the job. Hopefully he will succeed.
Current U.S. Treasury Yields
90 days 2.42%
180 days 2.44%
1 Year 2.42%
5 Years 2.25%
10 Years 2.42%
30 Years 2.83%
Is the Stock Market Half Full or Half Empty? The S&P 500 currently trades at 18.25 times next year earnings with a dividend yield of 1.9%. Earnings for the S&P 500 are estimated to grow 9% in 2020. Growth stocks have outperformed value stocks over the past eighteen months.
One of Our Own. The Monteagle Value Fund (MVRGX) which we have managed since 1999 currently trades at 15.7 times 2020 earnings and provides a dividend yield of 3.27%. We believe the time is right for value stocks to perform reasonably well in the current environment as investors left the stock market throughout 2018 running to quality. For the record, the Fund has risen from $13.25 to $15.13, or 14.18% from December 24, 2018 to March 28, 2019!
Our Current Equity Strategy. Using the Monteagle Value Fund as an example, our current equity strategy favors market weightings in energy, while we are overweight in industrials and material stocks. We are underweighted in financial, utility, and information technology stocks. We have held several of the large capitalization telecommunication and pharmaceuticals for well over 15 years. We have market weightings in health care and consumer stocks. Additional, the fund has 19% of its holdings domiciled in international markets. The stock turnover was at 6% for 2018 as we tend to hold investment positions for well over 5 years.
As Goes January, So Goes the Rest of the Year. Last year, stock mutual funds and exchange traded funds experienced a cash withdrawal from Labor Day to the end of the year of $95 billion. With the recovery in stock prices during the present quarter indicates that some of the cash returned to stocks. According to the Stock Trader’s Almanac (2019), the January barometer has worked 59 out of 68 years. Stock market strength in January, implies that the entire year will be strong. Should inflation numbers remain tame in 2019, the market could have better earnings than what is currently being projected.
We remain in Brentwood, Tennessee. On February 14, 2019 we celebrated our 23 anniversary as an independent investment advisory firm. We remain committed to providing investment plans that meet your individual investment needs. We consider it an honor to make investment decisions on your behalf.
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027