Morning Tack - “Supply Versus Demand”

Investment Strategy US RESEARCH | PUBLISHED BY
RAYMOND JAMES & ASSOCIATES

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

“Hey Jeff, you mentioned this morning that the equity market’s rise currently may be more about an absence of supply rather than a pickup in demand. Is it also fair to say December low was the opposite? Just want to make sure I am interpreting things correctly. Thanks.”

. . . A financial advisor

I received a number of emails yesterday about this statement in yesterday’s Morning Tack. Most of them read like this:

“Hey Jeff, you mentioned this morning that the equity market’s rise currently may be more about an absence of supply rather than a pickup in demand. Is it also fair to say December was the opposite? Just want to make sure I am interpreting things correctly. Thanks.”

I guess I need to further explain that comment. The selling climax low that ended on December 24, 2018 was one of the worst I have ever seen. It left the equity markets about as deeply oversold as they have ever been. I have explained the reasons for said selling (hedge fund liquidation, mutual fund redemptions, ETFs being sold, tax loss selling, etc.). The selling squall exhausted the sellers (read: no more “supply”). Consequently, even with little in “demand” (read: buyers) the slightest pick-up in potential “buyers” overwhelmed the reduced “sellers (read: supply of stocks). The subsequent rebound rally has been intense, with January being the best January performance in about 30 years. The rally has lifted the S&P 500 (SPX/2737.70) back above its 50-day moving average (DMA) of 2611.66 and is now challenging its 200-DMA of 2741.77. Clearly, the SPX has overshot my near-term trading target of 2600- 2650. However, as we have written earlier this week:

Despite the overbought condition, our work suggests the equity markets can trade higher into mid-February’s energy peak often referenced in these reports. Despite that outlook, we do not trust the overbought condition the equity markets have currently worked themselves into and continue to advise caution on a short-term trading basis. That said, there is now plenty of internal energy in the equity markets to continue the move.

In yesterday’s missive I expanded on that comment by noting:

The equity markets are consolidating to the upside, which is pretty consistent with what my indicators have been telegraphing even though I remain concerned with the overbought conditions of the equity markets. That upside consolidation should be followed by yet another breakout to the upside with a secondary trading target of 2800 – 2820, which should stall into the mid-February energy peak timing zone.

Ladies and gentlemen, if we are going to get a pullback it should come from that energy peak. However, to reiterate my comments since the second 90% upside day of January 3, 2019, we continue to think the December lows will not be retested. As the acute John Murphy, famed technical analyst and author, writes as a headline for a recent blog entry:

WHAT TO MAKE OF THE 2019 REBOUND -- BEAR MARKET RALLY OR START OF A NEW UPLEG? -- S&P 500 NEARS TEST OF 200-DAY AVERAGE AND MAYBE ITS DECEMBER HIGH -- WEEKLY CHARTS ALSO SHOW IMPROVEMENT -- MONTHLY CHARTS, HOWEVER, SUGGEST MORE CAUTION AS BULL MARKET NEARS ITS TENTH ANNIVERSARY.

Obviously, I continue to embrace the secular bull market theme. As my pal Leon Tuey writes:

Many continue to hold the view that a bear market had commenced or that a "cyclical bear market" is in progress. Clearly, they have no understanding of the market’s logic and they confuse the various market indices with "the market." As mentioned, what investors saw was nothing more than a normal reaction to an overbought condition registered in the August/September period. The plunge in the averages was caused by the drop in the heavyweights; the various Advance-Decline Lines, however, just went through a garden variety correction, one of the mildest in this great bull market. Since the seers (and most investors) only pay attention to the market averages and not to “the market," the plunge in the market averages caused widespread fear.

Since Powell backtracked and the People's Bank of China stepped up liquidity injections, global money supply has round-tripped to March 18 levels. Forget earnings or macro. This is why markets have rallied. History shows that buying stocks at or near all-time highs, with stretched valuations, because the Fed is easy while the economy begins an ebbing cycle is a path to ruin (See 1999-2000, 2007-2008). U.S. stocks are extremely overbought on a trading basis and short-term basis. A spirited retreat can appear at any time. However, for the foreseeable future, most traders will continue to buy any and all dips because the Fed Put has been reinstated.

This should end with the mid-February energy peak, but I do not believe the December low will be retested. This morning futures are flat . . .

February 6, 2019

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2008 Myth and Reality

First Trust Monday Morning Outlook

February 4, 2019

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

We’ve written about it over and over, and while many advisors seem to understand, the media, politicians, and many analysts don’t…or won’t. So, we thought we’d try again to explain why so many people don’t understand the nearly ten-year long bull market in U.S. equity values.

Conventional Wisdom places the blame for the 2008 Financial Panic at the feet of Wall Street, and heaps praise on QE, TARP, and bank stress tests for saving the world. It has been repeated so often that even many conservative/libertarian analysts have succumbed to thinking the crises was papered-over by government money and that any day now the “sugar high” will come to an end.

This is why “corrections,” like the US stock markets experienced late last year generate so much fear. There is a cadre of traders, media-types, and just plain old hangers on who can’t wait to be the next Nouriel Roubini and make one great call in a row.

What makes it worse is that the truth is there for the taking, but the conventional wisdom simply ignores it. In Peter Wallison’s book “Hidden in Plain Sight,” he very clearly shows it was Fannie Mae and Freddie Mac who pushed the subprime loan space. Congress and HUD urged mandated that Fannie and Freddie buy more subprime paper, and by 2007 - along with the federal government - they owned 76% of it. Yes, Wall Street is culpable too, but government drove the marketplace. Wall Street simply wouldn’t have been issuing these bonds without Fannie and Freddie’s voracious appetites.

Even Ben Bernanke has argued that subprime loans themselves weren’t large enough to take down the system. He blames derivatives, undercapitalization, and interconnected banks. By his verdict, the government gets off scot-free.

But this completely ignores the role that FASB 157, otherwise known as mark-to-market accounting, played. Mark-to-market accounting forces banks to take a few bids from the marketplace and use those bids to value assets. Cash flow doesn’t matter, underlying asset values don’t matter. And what happened was a disaster. The market for loans froze, and even assets that were still paying on time sold at fire-sale prices.

If a bank owned a pool of 1000 mortgages and 300 of them defaulted (which given the collapse in underwriting standards by Fannie and Freddie wasn’t impossible to expect), then that pool still payed 70 cents on the dollar. But, because the market was frozen, bids fell into the teens for an asset paying 70 cents in cash. FASB 157 forced banks to take the “bid,” push it through their income statement, and subtract the losses from capital. This, in turn, created the bigger problems. There was no willingness to invest in banks when, at any time, they could be wiped out by mark-to-market losses. The fire became an inferno.

This was a capital problem, not a liquidity problem. But, the Federal Reserve started Quantitative Easing anyway in September 2008. Hank Paulson pushed the $700 billion TARP bill through that October. Nonetheless, the market kept falling. The S&P 500 fell an additional 40% after TARP – bank stocks fell 73%. QE and TARP weren’t the cure.

It was March 9, 2009, when Barney Frank’s Financial Services Committee announced a hearing with FASB on this really dumb accounting rule, that the market turned around. Yes, it’s true that the actual rule wasn’t reversed until April, but on March 9th the financial markets realized the change was coming.

What happened after that is recorded for history. The market is up 300%, banks healed, asset values rose, and a “normal recovery” began. New technology – fracking, apps, 3D printing, the cloud, smartphones – lifted productivity and profits, and stocks responded. It was not QE that lifted the stock market; TARP didn’t save the banks.

Unfortunately, because so many Republicans back the government-led version of history, many younger Americans have come to believe that free markets fail, and governments can engineer growth. No wonder there are so many fine young thinkers who seem to back socialism these days. After all, even Republicans support government intervention. President George W. Bush defended TARP by saying we had to “violate free market principles in order to save the free market.”

Nothing could be further from the truth. Either you believe in free markets, or you don’t. The Bush administration and its supporters bowed to the popular, but false, narrative. They have yet to find a way to explain their positions. As a result, socialist tendencies are rising in America.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Recession This Year? Don’t Count on It [VIDEO]

Real-time indicators suggest the economy will keep growing in 2019, says Chief Investment Officer Larry Adam.

January 15, 2019

“To view video please click HERE”

Recorded January 9, 2019 with Larry Adam, CFA, CFP®, CIMA®.

10 Themes That Will Dictate the 2019 Markets

What can investors expect from the financial markets this year? Chief Investment Officer Larry Adam offers his perspective.

 January 15, 2019

Last year was challenging for investors, marked throughout by notable market volatility. But that isn’t uncommon for an economy that’s entered the late phase of the business cycle. We’ve enjoyed an unprecedented economic rally since the Great Recession ten years ago – but with monetary stimulus, fiscal stimulus, economic growth, employment growth and earnings growth likely to decelerate in 2019, the credibility of this record-approaching expansion will be questioned.

Below, we’ve provided our views and insights for the U.S. economy and major global asset classes in 2019. The bottom line: the late-cycle environment we envision does not mean the end of the cycle, and this perspective frames our optimistic yet tempered views for the upcoming year.

1.  U.S. Economy Achieving Record Eclectic Expansion

Credibility Challenge: Can the economy maintain its momentum with decelerating monetary and fiscal stimulus?

With little sign of recession, we foresee the current expansion notching record duration in July and continuing to grow – albeit more slowly – at an above-trend pace. Expect 2019 GDP growth of 2.4%.

2.  One Step at a Time for the Federal Reserve

Credibility Challenge: Will the Fed engineer a policy error and overtighten?

We expect the Fed to remain “data dependent” and flexible as inflation is contained and global growth challenges mount. Expect one or two interest rate hikes in 2019.

3.  Increased Volatility Keeping Investors on Their Toes

Credibility Challenge: Investor sentiment will be confronted by a return to a higher volatility regime, which will question the success of the “buy the dip” mentality.

The low probability of a recession and positive performance expectations for most asset classes should provide more opportunities for investors of risk assets as well as ample occasions for active managers to outperform.

4.  Bearing Down on Bonds and Cashing In

Credibility Challenge: Bonds, in aggregate, have struggled as interest rates moved higher and spreads widened. Is the 30-year bond bull run over? Is cash no longer unproductive?

While a healthy economy and “quantitative tightening” should place upward pressure on interest rates, the reset higher in yields and spreads makes bonds only incrementally more attractive. Expect the 10-year Treasury yield to move to 3.2% and the yield curve not to invert. With short-term rates likely to move slightly higher, cash is now a viable alternative.

5.  Minding the (Equity) Gap

Credibility Challenge: Can U.S. corporate earnings move higher without additional tax cuts? Can a continued ascent in earnings outshine “peak earnings growth”?

U.S. corporate earnings should move higher on the back of modest economic growth, solid corporate confidence and buybacks. While earnings growth will decelerate to single digits, 2019 will not be the peak dollar amount for earnings. Higher earnings support our 2,960 S&P 500 target.

6.  Favoring Cyclical Sectors

Credibility Challenge: The significant outperformance of cyclical sectors over the last several years has prompted investors to expect a shift to defensive sectors.

Leverage to economic growth, superior earnings growth, attractive valuations, higher shareholder value dynamics (e.g., dividend growth and buybacks) and less sensitivity to rising interest rates encourage us to be biased to the cyclical sectors – particularly technology, energy, industrials and healthcare.

7.  International Intrigue Emerging

Credibility Challenge: International equity investors have experienced inferior performance (vs. the U.S.) for multiple years, compounded by a strengthening dollar. Will international equities continue to be a drag on portfolios?

While attractively valued, developed international markets will likely continue to struggle to outperform the U.S. as political drama intensifies. We favor emerging markets, particularly in Asia, which could benefit from a trade deal, a less-aggressive Fed and stabilization of the dollar. 

8.  Dynamite Dollar Dynamics Drying Up

Credibility Challenge: Can the U.S. dollar maintain its historically long bull market rally?

A less aggressive Fed, less upside surprise potential for the U.S. economy and the fading of some European political risks favor at least stability for the euro. While the dollar is not expected to weaken significantly, it likely peaked in 2018.

9.  Oil Leaping Higher

Credibility Challenge: Can OPEC rally oil prices after the 40% decline from recent highs?

The pullback in oil prices should begin to reduce U.S. production as producers become disincentivized. Global oil market forecasted to become undersupplied in 2019 due to OPEC cuts and Iran sanctions. Expect oil to rally to $62 per barrel by year end.

10.  Technology: A Sustainable Revolution

Credibility Challenge: The technology sector’s recent correction has called into question the sustainability of its leadership quality.

The recent pullback provides an attractive entry point into a sector that continues to grow its earnings and expand its disruptive forces to almost every sector of the economy.

Larry Adam, CFA, CFP®, CIMA®. All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. The yield curve is a graphic depiction of the relationship between the yield on bonds of the same credit quality but different maturities. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index Past performance may not be indicative of future results

No Sign of Recession

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Talk about destroying a narrative. On Friday, the Labor Department reported 312,000 new jobs in December, with an additional 58,000 from upward revisions to prior months. Recession talk got crushed. The Pouting Pundits of Pessimism claim jobs are a lagging indicator, but the pace of payroll growth starts declining well before a recession starts. In the twelve months ending in June 1989 nonfarm payrolls increased a robust 225,000 per month. In the next twelve months payrolls rose a softer 153,000 per month and then a recession officially started in July 1990. A similar pattern happened before the next two recessions, as well. In the twelve months ending in February 2000, payrolls rose 250,000 per month before decelerating to 137,000 per month in the next twelve months. A recession started in March 2001.

“Click HERE to read more”

This information was developed by First Trust, an independent third party. The opinions of Brian S. Wesbury, Robert Stein and Strider Elass are independent from and not necessarily those of RJFS or Raymond James. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. All investments are subject to risk. There is no assurance that any investment strategy will be successful. There is no guarantee that these statements, opinions or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results .

Dow 28750, S&P 3100

12/31/2018

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Early in 2018 we said the US economy has gone from being a Plow Horse to Kevlar.  Nothing that has been thrown at the economy since – neither trade conflicts nor tweets, not higher short-term interest rates nor the correction in stocks – is likely to pierce that armor.   

 A year ago the economic consensus was that real GDP would grow 2.5% in 2018.  And yes, that was after the tax cuts were passed.  By contrast, we were more optimistic, projecting that real GDP would be up 3.0% in 2018.  If we plug in our forecast for 2.0% real GDP growth in the fourth quarter, the economy will have grown 2.9% for the year.  If, instead, we use the Atlanta Fed’s estimate of 2.7% for Q4, we’d get 3.1% for the year.  Either way, we just about nailed it.

 Now, the same consensus that a year ago suggested the economy would only grow 2.5% in 2018 with the tax cuts is saying the economy is going to slow down to a pace of 2.3% in 2019, in part because of the supposed reduction in stimulus related to those very same tax cuts.  

 Once again, we’re not buying it.  The benefits to growth from having a lower tax rate on corporate profits and less regulation are going to take years to play out.  Companies and investors around the world have only begun to react to the US being a more attractive place to operate.  As a result, we’re forecasting another year of 3.0% economic growth.        

 Further, we expect the unemployment rate to keep gradually falling, as continued job growth offsets an expanding labor force to push the jobless rate down to 3.3%, the lowest since the early 1950s.  Last year the consensus predicted the jobless rate would decline to 3.8% in 2018; we predicted 3.7%.  Right now it’s already 3.7% and we think a drop to 3.6% is likely for December when that report comes out January 4.       

 On inflation, it looks like we’ll finish this year with the Consumer Price Index up about 2.0%, although it would have been higher were it not for what we think is a temporary downdraft in oil prices.  The consensus had projected 2.1% and we had been forecasting 2.5%.  Look for a rebound in oil prices and ample monetary liquidity to help push the CPI gain to 2.5% in 2019, which would be the largest gain since 2011.  

 The tricky part is what to expect from the Federal Reserve in 2019.  Based on our economic projections, and if the economy were the Fed’s only consideration, we could get as many as four rate hikes in 2019.  After all, nominal GDP growth – real GDP growth plus inflation – is up 5.5% in the past year and up at a 4.8% annual rate in the past two years.  Raising rates four times in 2019, which is more than any Fed decision-maker projected at the last meeting in December, would only take the top of the range for the federal funds rate to 3.5%, still well below the trend in nominal GDP growth. 

 But we think the Fed will have a two-part test for rate hikes in 2019.  First, as we just explained, the economy itself.  Second, the yield curve.  We think the Fed will be very reluctant to see the federal funds rate go above the yield on the 10-year Treasury Note and will strive to avoid either an active or passive inversion of the yield curve.  An active inversion would be the Fed directly raising the federal funds rate above the 10-year yield; a passive inversion would be raising the federal funds rate so close to the 10-year yield that normal market volatility could send the 10-year lower than the funds rate.  

 As a result, we think the Fed will want to leave a “buffer zone” between the 10-year and the funds rate of about 40 basis points.  So, for example, if the 10-year yield stays near its current level throughout all of 2019, we could end up with no rate hikes at all in spite of economic conditions.

 Our projection, though, is that the 10-year yield moves higher to reflect more strength and resilience than the consensus now expects.  If the 10-year yield finishes 2019 at 3.40%, as we expect, that would leave room for two rate hikes, maybe three.               

 For the stock market, we expect a soaring bull market, with the S&P 500 reaching the 3100 we projected for 2018 a year ago.  Yes, we know that sounds bold, but our Capitalized Profits Model is screaming BUY. 

 The model takes the government’s measure of profits from the GDP reports divided by interest rates to measure fair value for stocks.  Our traditional measure, using a current 10year Treasury yield of about 2.75% suggests the S&P 500 is still massively undervalued.  

 But if we use our forecast of 3.40% for the 10-year yield, the model says fair value for the S&P 500 is 3100.  And that leaves room for equities to go even higher if, as we think, profits move higher next year, as well.  The model needs a 10year yield of about 4.35% to conclude that the S&P 500 is already at fair value, with current profits.

 The bottom line is that we’re calling for the S&P 500 to finish at 3,100 or higher next year, which would represent a nearly 25% gain from Friday’s close.  The Dow Jones Industrial Average should end the year at 28,750.

 Yes, this is likely to be one of the most optimistic forecasts you see, if not the most optimistic one of all.  But, in the end, we do best by our readers when we tell them exactly what we think is going to happen, without altering our projections so we can run with the safety of the herd.  Grit your teeth if you have to; those who stay invested in the year ahead should earn substantial rewards.    

“Click HERE to read more”  

 Consensus forecasts come from Bloomberg.  This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any security.                      

No Deal In Sight To Reopen The Government

With neither side showing any sign of compromise, the partial shutdown could extend until January, says Washington Policy Analyst Ed Mills.

December 31 , 2018

The government is shut down; the Treasury Secretary is holding a meeting of the “plunge protection team”; press reports provide conflicting accounts related to President Trump’s discussion to fire the Chairman of the Fed; the departure of the Secretary of Defense, General Jim Mattis, has been moved up to January 1; and the State Department’s special envoy to combat ISIS, Brett McGurk, is following Mattis out the door.

Government Shutdown

Parts of the U.S. Government – including the Department of Homeland Security, Treasury, Commerce, and Department of Interior – remain closed following a missed deadline to agree on funding the border wall with Mexico. No deal is in sight and Congress is adjourned through December 27. This shutdown could easily stretch into January as the new Congress convenes January 3. The normal pressure on the personal lives of members of Congress and the president did not produce a deal, and neither side shows any real sign of compromise. There are multiple paths forward but no consensus yet on the most likely resolution. We believe an increase in funding above the $1.3 billion for the construction of metal fencing could give the president enough of a victory to accept the deal.

Plunge Protection Team

Secretary Mnuchin is set to convene the president’s working group on financial markets, a committee that was created in the Reagan administration to monitor the stock market. The meeting comes after Mnuchin held calls with the CEOs of the top six U.S. banks over the weekend. Following these phone calls, he reported that all banks have adequate liquidity and the markets are functioning properly. These actions, while appropriate given the recent sell-off, seem to raise more questions than answers – especially as no one had seemed to raise any concerns related to these issues about which Mnuchin is seeking to reassure the market.

Fed Chair

The Secretary of the Treasury and the president’s Chief of Staff issued statements this weekend that the president will not fire/does not believe he has the authority to fire the Chair of the Federal Reserve, Jerome Powell. There is a debate about the ability of the president to "fire" the Chairman of the Federal Reserve, with question related to the ability to designate and/or appoint a new Chair. The Senate would need to confirm the president’s pick, and indications from the Senate is that there is no support for such an act. The longest-serving Republican on the Senate Banking Committee, Richard Shelby (R-AL), was critical of these reports over the weekend and supports the Fed’s independence. There are also reports that the president’s staff is discussing a potential Trump-Powell meeting. We do not believe the Senate would support any decision of the president to fire Powell, but the uncertainty created by these stories will add to the volatility surrounding each of the Fed’s decisions.

National Security Personnel Changes

Deputy Defense Secretary Patrick Shanahan will take over as acting secretary for departing Defense Secretary Jim Mattis on January 1, two months before his announced departure. Shanahan is a former Boeing executive and has been seen as a supporter of the Pentagon’s focus on procurement during the first two years of the Trump Presidency. It is unusual to have an acting secretary at the Defense Department, as the tradition is for the current secretary to stay on until his replacement is announced and confirmed by the Senate. Adding to the negative national security headlines, the State Department’s special envoy to defeat ISIS, Brett McGurk, also resigned. He is not a household name, but was well-respected in D.C. and his departure raises questions about other potential national security departures in the coming weeks.

February/March Likely Volatile Policy Months

The deadline on China trade is March 1, the Treasury is expected to begin emergency measures to manage the debt limit in March, and the Mueller investigation is expect to release its report in mid-to-late February. We will be monitoring these events to see how much they potentially weigh on the markets.

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.

10 Important Tax Changes to Keep In Mind

As you consider making any final year-end tax planning moves, review the major changes that are now in effect.                   

 December 31, 2018   

As you continue with your 2018 year-end tax planning, refresh your knowledge of the tax changes that are now in effect. Given the complexity, it’s smart to consult with your tax, financial and legal professionals to ensure you’re managing your wealth in the most tax-efficient way possible. Start the conversation with these topics and go from there.

Finding Your New Bracket

There are still seven brackets for 2018; the highest is now 37% instead of 39.6%. Where do you fall?

Income tax brackets have shifted. The act eliminates the so-called marriage penalty in all but the highest brackets and removes much of the disadvantage of the married-filing-separate status.

1. “Click HERE to read more”

   Asset allocation and diversification do not guarantee a profit nor protect against a loss. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Rolling from a traditional IRA into a Roth IRA may involve additional taxation. When converted to a Roth, the client pays federal income taxes on the converted amount, but no further taxes in the future. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Sources: Raymond James “Tax planning: Income and retirement” white paper; forbes.com, irs.gov

Morning Tack - “Dow Theory Redux”

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | jeffrey.saut@raymondjames.com December 14 2018 | 7:45 AM EST

Forgive me, but I am sick of answering questions about Dow Theory since there are FAR too many pundits that have not studied Dow Theory and, therefore, do not understand the concept put forth by Charles Dow, expanded on by Robert Rhea, William Hamilton, and our dear departed friend Richard Russell of Dow Theory Letters, which I have read since I began in this business in 1971 (I actually wrote an epitaph about him a few years ago). Yesterday’s questions were summed up in this composite letter from a Raymond James’ client:

“Can you explain why you are using the March 2018 lows of the D-J Industrials for a Dow Theory sell-signal instead of lows made since the new confirmed highs were made.”

So this is the last time I am doing this. First, the new all-time highs by the D-J Transports were made in September of this year along with new all-time highs from the D-J Industrials. Since then, both of those major indices have been on the skids. While it is true the Transports have broken below their closing low of the past 12 months, the Industrials have not. The trailing 12-month closing low for the Industrials was made on March 23, 2018 at 23533.20. By the method of interpreting Dow Theory that I was taught by my father, and after extensive readings of Charles Dow, Rhea, Hamilton, and Russell, THAT is the closing low that should be used as a confirmation by the Industrials of the breakdown by the Trannies, QED!

“Can you explain why you are using the March 2018 lows of the DJ Industrials for a Dow Theory sell-signal instead of the lows made since new confirmed highs were made?”

. . . A Raymond James client

“To view graph click HERE”

. Source: FactSet. Data as of 12/14/18 6:57 a.m.

So yesterday’s Dow Theory questions were prompted by the slide in the Transports from their December 3, 2018 intraday high of 11044.67, into yesterday’s intraday low of 9604.23, for a 10-day pullback of some 13%. The culprits of yesterday’s decline seemed to be the airline stocks, which surrendered roughly 5% for the session on warnings about future revenue growth. Why revenue growth is in question is a mystery to us, since we fly roughly 200,000 air miles a year and are ALWAYS on full planes, but there you have it.

Then there was this from savvy seer Jason Goepfert (SentimenTrader):

"CFOs are pessimistic. A survey of 500 corporate CFOs shows that, during the recent quarter, they have become the least optimistic on the U.S. economy’s prospects in 7 years. Mom & pop are, too. The latest survey from the American Association of Individual Investors showed a big drop in optimism. The Bull Ratio dropped to 30%, the lowest since February 2016. Bank blahs. Several of the largest banks in the U.S. are down at least 7 days in a row and trading at 52-week lows. For the 2nd largest bank, BAC, it’s the first time since 2011. It’s happened 6 times in 25 years, leading to rebounds three weeks later 4 times."

The Industrials were again unable to hold their early gains, leaving yesterday’s declining issues at 64% of total Advancing to Declining issues. Downside volume also dominated with 60% of total Up/Down Volume coming on the downside. This morning, Theresa May’s bid to rescue the Brexit deal is rejected by the EU, the National Enquirer newspaper says it will share all of the information it has on the President (this is a big deal), and very weak economic reports out of China and Europe have left the preopening S&P 500 futures down some 22 points as we write at 5:20 Friday morning. If that holds into the opening bell, it means the S&P 500 (SPX/2650.54) is going to test the 2580-2600 level again. Good grief . . .

Please read domestic and foreign disclosure/risk information beginning on page 2 and Analyst Certification on page 2. INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER | 880 CARILLON PARKWAY | ST. PETERSBURG FLORIDA 33716

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Morning Tack - Persistent Selling

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | jeffrey.saut@raymondjames.com December 12 2018 | 8:02 AM EST

Yesterday, someone sent us this tweet from stock market guru Ralph Acampora that read, “Monday's intraday activity and its closes on the leading market indexes were impressive: it's called a ‘key reversal-day’ on a bar chart and a ‘hammer’ pattern on a candlestick chart. They suggest that an important near-term low was made.” Now, for nontechnical folks, a hammer formation in the candlestick charts is defined as follows:

“A hammer is a type of bullish reversal candlestick pattern, made up of just one candle, found in price charts of financial assets. The candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick (see chart 1, page 2).”

Also suggestive that a bottom was made on Monday was what our deceased friend Ralph Block used to term a multi-swinging session. To wit, “Ralph was a huge fan of a crater opening, multi-swinging session that ends near the high of the day. Looks like it was just what he would have wanted!” We would add that the McClellan Oscillator is pretty oversold on a short-term basis (chart 2, page 2). Likewise, the Russell 2000 is some 10% below its 200-day moving average and, therefore, oversold (chart 3, page 3). And, don’t look now, but the energy complex is very oversold (also has a hammer chart formation – see chart 4, page 4) with the anecdotal evidence that a bottom is near with three large energy-centric hedge funds closing their doors.

"Monday's intraday activity and its closes on the leading market indexes were impressive: it's called a ‘key reversal-day’ on a bar chart and a ‘hammer’ pattern on a candlestick chart. They suggest that an important near-term low was made.”

. . . A tweet from stock market guru Ralph Acampora yesterday

“To view graphs and read more click HERE”

.. Source: FactSet. Data as of 12/12/18 7:40 a.m.

As for the questions about a Dow Theory “sell signal” that are being trumpeted by some on the Street of Dreams, by our method of interpreting Dow Theory, there has been no “sell signal.” The problem is these folks are using the November closing low for the Industrials, which is the wrong reaction closing low to use. While it is true the D-J Transports notched a new reaction low last Friday, the D-J Industrials have not violated their March 2018 closing low (the right closing low to use). As such, what we have, according to Dow Theory by our method of interpretation, is a downside non-confirmation, which should be interpreted bullishly.

As for all of the questions about the “persistent selling” we are experiencing, it is due to the algos, tax loss selling, and hedge fund liquidation. Recall that many hedge funds only give their investors one time a year to pull their money from said funds. Those letters from the hedge funds tend to go out on November 15 with a “window” to pull your investment funds extending into December 31. Clearly, the hedge funds have had a really difficult year in 2018, and it is not being helped in the typically ebullient month of December. Remember, “If Santa fails to call, the bears will roam on Broad and Wall.” And then there was this from the sagacious Jason Goepfert of SentimenTrader fame, “It’s not just Financials, Energy stocks have been faltering, too, with more than 40% at a new low. And fewer than 5% of them are above their 10-, 50-, and 200-day moving averages. There have been 23 days since 1990 when selling was this widespread.” If that sounds like capitulation, it should! So, unless we are into another “selling stampede” (this would be session six in what typically is a 17–25 session stampede), there should be a near-term bottom at hand. Yesterday, NYSE breadth diverged negatively after the NYSE opening. Apparently traders and algos bought the incessantly recurring US-China trade deal hype, but large institutions did not. On a positive note, President Trump says he would intervene in the U.S. case against Huawei’s CFO if it would secure national security interests, or help close a trade deal, with China. As Sophocles said, “Not knowing anything is the sweetest life.” This morning, the preopening futures are sharply higher on the president's statement that he would intervene in the Huawei CFO incident if it will help with a Chinese trade deal.

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Temporary Trade Truce Buoys Markets

Investors continue to monitor tech sector volatility, Brexit negotiations and Italian debt.

December 3, 2018

The market gyrations that characterized October continued through November, leaving the major domestic stock indices essentially flat for the month. The same issues were on investors’ minds, namely trade issues, tech sector volatility, Brexit negotiations and Italian debt. Although economic data for the United States has been relatively positive, concern seems to be building that the pace of economic and earnings growth will slow in 2019, explains Nick Lacy, chief portfolio strategist for Raymond James Asset Management Services, exacerbated by declining sentiment and global growth measures.

“Slower growth doesn’t mean a contraction,” Lacy clarified. “Things are actually in pretty good shape, which gives me reason to believe the markets will be fine.”

After months of elevated tensions between the U.S. and China, investors welcomed news of a trade ceasefire that emerged from the G20 summit over the first weekend of December. President Trump and China’s President Xi agreed to halt tariff escalation for now and continue dialogue on the more difficult questions of China’s structural reforms with a 90-day timeframe. Given the challenges ahead, negotiations may begin to fray, and the threat of a tariff hike to 25% (with an additional tariff package as further leverage) could re-enter market considerations, explains Washington Policy Analyst Ed Mills.

In the immediate term, China will begin purchasing a yet to be determined quantity of U.S. agricultural, energy and industrial products. China also signaled willingness to institute stricter controls on opioid exports. This arrangement is essentially a “lite” version of the nixed agreement in May. However, an encouraging sign is that the terms have expanded to broader questions in the spirit of negotiating a larger deal, and the worst-case scenario of significant immediate-term escalation has been put on hold, Mills added.

“Click HERE to view graph”

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

Economy

• Recent economic data reports have been consistent with moderate growth overall, explains Raymond James Chief Economist Scott Brown.

• The first half of next year should bring more fiscal stimulus in the form of tax cuts and government spending, which should support growth, but the impact is expected to fade in the second half, Brown notes.

• The pace of future rate increases is uncertain, but the central bank is expected to raise rates more slowly in 2019. Fed Chairman Powell recently noted that the federal funds rate “remains just below the broad range of estimates of the level that would be neutral for the economy – that is, neither speeding up nor slowing down growth.” However, most Fed officials see the neutral rate as higher than the bottom of the range.

• Powell’s hint that we are near neutral and that the central bankers are considering a more flexible approach did not escape the attention of market observers, like Chief Investment Strategist Jeff Saut.

Equities

• Investors welcomed news of the U.S.-China trade détente, and equities are likely to strike a positive tone in the coming weeks, noted Michael Gibbs, managing director of Equity Portfolio & Technical Strategy.

• However, with both sides far apart on major issues (such as intellectual property rights), investors will likely remain guarded until they see actual progress. “For this reason, we do not budge from our stance that the S&P 500 will remain range-bound, trading (low to mid-2600s to mid-to-upper 2800s) in the coming months.” Gibbs said. “The news only causes us to believe the market remains in the mid-to-high end of the range in the coming weeks.”

• With substantial manufacturing in China, numerous companies were at risk of margin compression if tariffs moved up to 25%. The consumer discretionary sector is a beneficiary as well with products bound for the U.S. originating in China.

• With the S&P 500 still down 6% from the September peak and with over 53% of the stocks in the index down at least 15% from their 52-week highs, ample opportunity remains, he notes.

Fixed Income

• Given that the Fed left the discount rate unchanged in November, there remains a high probability that the central bankers will hike rates in December according to market expectations. Per the most recent Fed dot plot, another three to four rate hikes are anticipated in 2019.

• It’s likely that the bond market will continue to react to market conditions, and investors can expect some volatility in the near future. For example, the latest 10-year Treasury yield fell from 3.227% on Nov. 6 to 3.02% toward the end of November, points out Doug Drabik, senior fixed income strategist.

• While there has been ample attention paid to the equity markets over the past month, widening spreads in the high yield and BBB indexes suggest that equity market volatility is impacting “equity-like” fixed income, adds Peter Greenberger, director, Mutual Fund & 529 Plan Product Management.

• Look for the range to remain tight with a continued bias to a slightly higher range, barring any geopolitical impact, Drabik added.

International

• The U.S.-China agreement to pause their trade escalation can be viewed as a short-term face-saving measure that allowed both sides to come away with wins for their domestic audiences as the tougher part is left to be resolved over the next three months, according to Mills.

• President Trump is now directly involved in the process, increasing the sensitivity around the final outcome. If negotiations stall and the president comes under increased domestic scrutiny for a lack of progress, we are likely to see a return to an escalatory strategy, Mills noted.

• The United Kingdom has forged a tentative Brexit agreement with the European Union, but details on trade relations and other matters are essential to the stability of the UK economy, explains European Strategist Chris Bailey. Expect to see some significant political cajoling before an agreement eventually gets ratified.

• Meanwhile, the rest of the European Union is debating the proposed higher Italian budget deficit. The fear is that a higher deficit sets new regional precedents which may lead to instability in the region.

• Pan-European markets remain at a discount to their American peers and offer potential for both growth and income-focused investors, if issues such as Brexit and the Italian budgetary debate can be progressed, adds Bailey.

• Any signs of compromise will be taken positively. If calmer heads prevail, then 2019 can still offer plenty of opportunity in markets outside of the United States.

Bottom Line

• We continue to recommend staying in equities and fixed income, with a bias toward higher quality as late-cycle growth can last for some time, according to Lacy.

• Volatility could be an opportunity to buy if you are looking to put cash to work.

• Keep in mind that a well-diversified portfolio can help you weather downturns and recover more quickly on the upside.

Also, note that U.S. markets will be closed on Wendesday, December 5. The day has been designated a national day of mourning out of respect for former President George H.W. Bush, who passed away last Friday.

Your advisor will continue to watch for legislative updates as well as economic developments. In the meantime, please reach out to him or her if you have any questions.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. The process of rebalancing may result in tax consequences. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. High yield securities involve additional risks and are not appropriate for all investors. Price/Earnings Ratio is the price of a stock divided by its earnings. It gives investors an idea of how much they are paying for a company’s earning power. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services. Material prepared by Raymond James for use by its advisors.

How to stand up to the disease that is probably killing you

Published: Nov 12, 2018 11:48 a.m. ET

There are simple ways to combat ‘sitting disease’

Your morning walk won’t help to counteract the effects of a full day of sitting. Find ways to add more movement all day long.

This article is reprinted by permission from NextAvenue.org.

Not long ago, when I interviewed one of the leading experts on “sitting disease” — the buzzy catch phrase that’s been attached to physical inactivity for the past few years — he walked in place on his treadmill desk while we chatted by phone. The irony wasn’t lost on me: I was sitting idly at my desk while writing an article about the health problems associated with sitting idly at desks. Meanwhile, the expert in the know was staying active, even though he had a desk job.

I recently added a treadmill desk to my office, which I fashioned myself out of a regular treadmill and some supplies from the hardware store. It’s empowering to work while walking at 1.6 miles an hour, knowing that I’m taking care of my health.

Why sitting has become more routine

Unless you make an effort to get moving, it can be easy to fall into a physically inactive lifestyle. You can accomplish some of the same tasks from a seated position today that required walking just a few years ago: Think online shopping and drive-through everything. And with the widespread popularity of screen time, you’re likely allured into a seated position by your smartphone, laptop or TV for several hours daily. Between your desk job, commute, meals and nightly leisure time on the couch, you probably sit for the bulk of your day.

Unfortunately, an inactive lifestyle can be detrimental to your health. Prolonged sitting is linked to a host of health problems, including heart disease, diabetes, obesity, high blood pressure and cancer.

Luckily, research shows that there are simple ways to combat chronic physical inactivity, but it requires consistent effort; your morning walk won’t help to counteract the effects of a full day of sitting. Finding ways to add more movement all day long is key.

“Moving more frequently throughout the day, even at lower intensities and for shorter duration, has a positive impact on health markers and is just as important as regular exercise,” says Lauren Shroyer, director of product development for the American Council on Exercise.

Sneak movement into your lifestyle

Think about your daily schedule, then figure out ways to be more active.

“The default in America is to end up on your bottom,” says Dr. James Levine, author of “Get Up! Why Your Chair is Killing You and What You Can Do About It” and president of Fondation IPSEN, a Paris-based nonprofit medical research foundation. “I want the default to be up and doing something.”

See: This could be the best exercise for people over 50

The last time that I spoke with Levine — who is also the former director of obesity solutions for the Mayo Clinic — he was walking on his treadmill desk. Now he says that people can inspire themselves to be more active by mapping out a weekly plan, scheduling one appealing activity each day: Window-shopping downtown, volunteering at the library, wandering the aisles at Walmart or spending the afternoon with grandkids.

“The trick is absolutely to find the stuff that you want to do,” Levine says. “There’s no point in going to weight training if you hate going.”

Get up often

The problem with sitting is that once you park yourself at your desk or on the couch, you’re likely to stay seated for hours. But regularly shifting from sitting to standing helps to improve your health and preserve your long-term mobility.

“Losing mobility is probably the Number One cause of all the deteriorating we see with aging,” says Joan Vernikos, author of “Sitting Kills, Moving Heals: How Everyday Movement Will Prevent Pain, Illness, and Early Death – and Exercise Alone Won’t,” and former director of NASA’s life sciences division. “The most basic motion that you can do is structure your life so you have to change your posture often.”

Also read: Avoid these 7 exercises if you’re over 50

For this reason, Vernikos advocates standing often, whether you place your water bottle just out of reach to encourage movement or train yourself to get up when commercials come on TV. Her research found that standing for one to two minutes every 20 to 30 minutes helps prevent deterioration caused by physical inactivity.

“Your body needs this on-off stimulation of changing posture,” Vernikos says.

Standing from a seated position seems like the simplest of skills, but as people get older, the inability to do this prevents some from being able to use the bathroom independently, which makes them more likely to end up in a nursing home or assisted-living facility, Vernikos says.

Be more active at work and home

There are ways to counteract the inclination to stay seated all day.

“Most modern companies are offering some variant of active work: Walk-and-talk meetings, active lunchtime programs, walking clubs, running clubs, treadmill desks and standing desks,” Levine says. “There’s a whole range of active work opportunities, many of which cost nothing.”

If you’re retired, you don’t have to sit at home all day, even when you have no plans.

“Pacing the room while on the phone, using your standing work station or putting your laptop on the kitchen counter for 15 minutes are additional ways to work in more muscle activity throughout the day,” Shroyer says.

Do things the old-fashioned way

Just because there are modern conveniences doesn’t mean you have to use them constantly. Try doing activities the way you would have done them decades ago: Walk into your co-worker’s office to share an idea instead of emailing him. Visit the teller at the bank instead of frequenting the drive-through. Order something online, then pick it up at the store instead of having it shipped to you.

“If you want to improve or restore your mobility, be aware of what you’re not doing that you used to do,” Vernikos says. “Every time you go through the drive-through, you are aging yourself. Even getting out of your car and walking two steps to pick up your drugs at the pharmacy is something.”

Lisa Fields is a writer who covers psychology and health matters as they relate to the workplace. She publishes frequently in WebMD and Reader’s Digest.

This article is reprinted by permission from NextAvenue.org, © 2018 Twin Cities Public Television, Inc. All rights reserved.

By LisaFields

Are You Sabotaging Your Portfolio’s Success? [AUDIO]

INVESTMENT STRATEGY

Don’t make investing more complicated than it needs to be, cautions Andrew Adams, CFA, CMT, Senior Research Associate.

November 27, 2018

Click HERE to learn more

Recorded August 27, 2018. Hosted by Public Content Manager Paige Lenssen, CFA.

“Fading” Fiscal Stimulus; Really?

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Fed Chair Jerome Powell and others have started a new narrative about economic “headwinds.” They think past rate hikes, slower foreign growth, and “fading fiscal stimulus” should slow the Fed’s rate hikes. But is fiscal stimulus really fading?

Powell and others think the growth benefits of both the 2018 tax cuts and increased federal spending are winding down. This is pure Keynesian analysis and we think it’s wrong. In our view it reflects a misunderstanding of both how tax cuts work and the actual path of federal spending.

The difference is between demand-side (Keynesian thinking) and supply-side thinking. Keynesians think demand drives growth. In other words tax cuts work by putting more money in people’s pockets, which increases consumption and, therefore, GDP. They say the first year of a tax cut boosts aftertax incomes and demand, but then, stimulus fades as this boost is removed and income falls back to the previous (slower) trend.

Keynesians also believe federal government spending stimulates growth because it, too, is part of demand. In fact, government purchases are a direct part of GDP accounting and so it appears like government spending is a stimulus.

By contrast, supply-siders think incentives for entrepreneurship and investment drive growth. It is the supply of new goods and services that leads to faster economic activity. Say’s Law says “supply creates its own demand.” In other words, the tax cut led to better incentives to invest, work, and invent. And, as long as tax rates remain low a “permanent” change in incentives has been initiated, which will boost growth rates permanently. There is no “fade.”

Before the tax cut, the corporate tax rate in the US was approximately a combined 40% (federal, state, and local). In 2017, Canada had a corporate tax rate of 26.5%. So, there was a 13.5% incentive to invest in Canada over the US. And, at the margin, more investment went to Canada (and other countries with lower corporate tax rates) than would have been the case if the US tax rate was not the highest in the developed world.

Now the combined U.S. corporate tax rate is approximately 27%, radically changing incentives. In other words, at the margin, as long as tax rates stay where they are, there is a

permanent incentive to invest more in the US. This does not mean growth will accelerate from where it is now (roughly 3% GDP), but it will not automatically revert back to 2%, where it was from 2010-2017.

The more curious and misguided argument is that fading government spending will slow and reduce GDP. We think this comes from a misunderstanding of the budget deal which was passed last year. Yes, that budget deal increased spending, but so far it hasn’t shown up as a boost to GDP growth.

In Fiscal Year 2018, nominal GDP rose 5.0% over FY2017, while total federal spending went up just 3.2%. Government purchases, which feed directly into GDP, rose just 4.0%. In other words, relative to the private sector, government demand grew more slowly.

On top of this, total federal revenue was up 1% in FY2018. While corporate tax receipts fell 22%, total individual receipts were up 6%. In other words, while it’s true that the federal government collected fewer tax receipts in FY2018 than it budgeted prior to the tax cut, it still collected more revenue than it did in FY2017.

The bottom line is that the entire demand-side basis for the fiscal stimulus argument has no data to support it. Government spending grew slower than GDP and actual tax receipts went up. As a result, any argument that there will be “fading” fiscal stimulus is based on a data that does not exist.

The reason growth has accelerated is because lower tax rates, and less regulation, increase entrepreneurial activity – a supply-side acceleration in growth, not Keynesian. Anyone waiting for slower economic activity as fiscal stimulus “fades” will be waiting in vain.

The one worry we have is the exact opposite of what Keynesians argue. A new divided government adds to pressure for bipartisan legislation. Bipartisanship often means more government spending. As supply-siders, we view increased government spending as a drag on growth, not a boost.

The more government spends as a share of GDP, the smaller the private sector. That’s how growth will really fade.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

“To read more click HERE”

Stock Drops Aren't Easy, but This Week’s Were Expected

The market’s current bottoming process is playing out according to textbook, says Andrew Adams, CFA, CMT, Senior Research Associate.

November 14, 2018

It’s never fun to watch the stock market fall (unless you happen to be a short seller), but the weakness over the past few sessions hasn’t been too concerning since it was “supposed” to happen. The market got scary in October because it exceeded expectations for what we’d experience on the downside, but – so far, at least – the bottoming process off of the October 29 low in the S&P 500 is playing out according to textbook.

Two weeks ago, I expected any bounce attempt to eventually stall out about where the S&P 500 ran into trouble during its mid-October throwback rally. The index ended up slightly exceeding that level before dropping once more, but it was close enough for me to still have confidence in the way it was playing out. The rally off the following low ended up being a quick 8% move higher in just over a week – a pace that wasn’t sustainable even if the stock market did mark a major low at the end of October. Therefore, the weakness that’s followed is not a surprise and is consistent with the bottoming process that remains our base case scenario.

The upward jump made by the S&P 500 (and many other indices and stocks) on October 31 looms large, and the odds still favor seeing continued weakness that ultimately fills that gap, bringing us back to pre-October 31 levels. The stock market rarely trades exactly how you think it should, but a drop down to about 2685 that is met with strong buying demand would be about the best bottoming sequence possible. And with expectations for the future remaining depressed based on the evidence I see, I think the market would be set up quite nicely to surprise to the upside if it plays out that way.

Of course, anything can happen, and we will adjust if things develop in a way that diverges from our expectations. As of now, I am still proceeding as if the lows have been made until I am given a good enough reason to believe otherwise. One major reason I continue to have confidence that this remains a bottoming process is that even when I take a peek under the surface of the market, most areas remain above their recent respective lows. Oftentimes, we see strength in major averages like the S&P 500 though other areas continue to show weakness (e.g. small caps, international stocks, semiconductors, biotechnology, etc.). However, I am not currently seeing the red flags that would be raised if groups such as these broke down through their recent lows.

The same goes for breadth and momentum readings, which indicate that selling has not been as pronounced across the board over the last few sessions. If this pattern continues, it could mean that major bottoms have formed across the global market, further supporting an upside surprise. I am not really seeing many attractive individual setups yet, which is a bit concerning, but that could change with another round of strength here shortly.

As funny as it may sound, I am actually more worried about what happens if the market takes off again before returning to pre-October 31 levels. Gaps do not have to be filled, of course, but leaving it unfilled would force me to be a little more skeptical of any subsequent rally, since the question would remain if we’d drop back down to fill it at some point in the future. Since the indices are already close to those gap levels, they might as well fill them so we can move on.

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Investing in small- and mid-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index Past performance may not be indicative of future results.

Domestic Stocks Trembled Throughout October

The month offered investors tricks and treats in both global and domestic markets.

October 31, 2018

A year ago, domestic equity indexes showed sustained strength through the month of October. This year, October offered investors tricks and treats in both global and domestic markets. Thus far, the U.S. markets have given back most, if not all, their gains for the year. Some blame it on earnings; some on geopolitical and economic news, while others point to the specter of higher interest rates and world trade disruption.

While the U.S. is in great shape when it comes to economic and earnings growth, it may be more difficult to surprise on the upside, adding to the possibility of short-term volatility, explains Nick Lacy, chief portfolio strategist for Raymond James Asset Management Services. In addition, the Federal Reserve (Fed) is likely to raise rates again in December for multiple reasons, according to Chief Investment Strategist Jeff Saut. “The economy is strong, and the Fed is attempting to get to a ‘neutral rate’ in case the economy softens,” he added. The good news, he says, is that the market is oversold, and he is seeing bullish indicators for investors to redeploy cash.

Trade relations with China will be in focus in November with a potential meeting between President Trump and China’s President Xi reportedly being planned for the G20 summit, explains Washington Policy Analyst Ed Mills. The two sides have been at an impasse and are unlikely to come to a resolution in November. If talks continue to trend downward, the chances of an additional tariff on the remaining $267 billion of Chinese imports increase as the U.S. seeks further leverage. This is in addition to the 25% tariff set to go into effect on $200 billion of Chinese imports starting January 2019, currently set at 10%.

In Mills’ view, the upcoming midterm election is likely to shift the balance of power in Washington. Polls and forecasts are projecting a split result in Congress. Markets may react short term to election results – but longer term, Mills sees major policy shifts as unlikely with a divided legislative branch.

“To read more click HERE”

Odds and Ends

Read the weekly economic commentary from Chief Economist Scott Brown.

October 24, 2018

Periods of low market volatility (or complacency) are often followed by turbulent readjustments, including sharp intraday moves lower and higher. There has been a long list of concerns in the last few months: the November 6 election, tighter Fed policy, higher long-term interest rates, trade policy disruptions, risks to the global economy, labor market constraints, and so on. The stock market often climbs a wall of worry, sometimes you hit the wall. The near-term economic outlook remains optimistic, but there is also a vague pessimism about 2019 and 2020. We can expect to bounce between these views.

Elections are best viewed as a probabilistic event. Polls generally reveal preferences, but there is sampling uncertainty. Turnout is hard to predict. Nate Silver’s 538 website provides a comprehensive assessment of polls and offers probabilities for House and Senate races. Nate Silver is the man. While most pundits predicted that Hillary Clinton would win the 2016 presidential election, Nate put the odds at about two in three – which means that Trump had a one in three chance of winning (far from 0%). Currently, the 538 website shows an 85% chance that the Democrats will gain control of the House (all 435 representatives are elected every two years). Serving six-year terms, a third of Senators are up for election every two years (35 seats this year) and Democrats are playing defense (23 contested seats are currently held by Democrats, 2 are independents who normally side with Democrats, and 8 are held by Republicans). The 538 website places the odds of the Democrats gaining control of the Senate at 19% -- not out of the question, but very unlikely. So, a split Congress should be already factored into the financial markets.

What would a split Congress mean for the economic and market outlook? A Democratic-controlled House would be expected to conduct hearings on a wide range of issues involving the Trump administration, but that would be unlikely to lead to any significant policy changes. The House would not, by itself, be able to raise taxes or alter much of regulatory policy (which falls mostly under the Senate). A Democratic-controlled House could vote to impeach President Trump (which means he would be put on trial in the Senate), but it would take a two-thirds majority in the Senate to remove Trump from office. Hence, investors should not fear the current election expectation (of a split Congress). There is a small chance that the Democrats could gain control of both chambers, and that would be a different story, but that is a low-probability outcome (a longer shot than Trump winning the White House).

The impact of trade tariffs has continued to broaden, but the overall impact on growth and inflation appears to be relatively limited. An increasing number of firms are reported input price pressures, although the Producer Price Index indicates some moderation following sharper increases in the first half of the year. Soybean exports appear to have been boosted in 2Q18 (adding to GDP growth), ahead of Chinese retaliatory tariffs, leading to a pullback in 3Q18 (subtracting from GDP growth). In contrast to the first round of tariffs on Chinese goods ($50 billion, imposed on July 6 and limited mostly to industrial inputs), the second round ($200 billion, imposed on September 17) included industrial inputs, capital equipment, and some consumer goods. Those tariffs, currently 10%, are set to rise to 25% on January 1, which would have a more substantial impact on consumer spending and inflation heading into the important spring retail season. President Trump has also threatened to impose tariffs on an additional $267 billion in Chinese goods, which would hit the consumer sector even harder. The U.S.-Mexico-Canada Agreement (USMCA) has reduced some trade policy uncertainty, but the impact on the auto industry is unclear (Trump has threatened to impose tariffs on auto imports).

Fed policymakers continue to view trade policy as a downside risk to the U.S. economic outlook, but officials seem willing to wait for more evidence of the impact before adjusting policy expectations. As the federal funds target rate nears a neutral level, the risks of a policy error increase. This has been the central focus for Fed officials in recent months, and the consensus at the Fed is that the gradual approach to raising rates best balances the risks of moving too slow or too fast. Monetary policy decisions will remain data dependent – specifically, since monetary policy must be forward looking, it is what the data imply for the outlook for growth and inflation. However, financial conditions also play a role. All else equal, stock market softness implies that the Fed would be somewhat less likely to raise short-term interest rates – but that depends on the magnitude of the decline, how long it lasts, and whether it feeds through to the real economy. The stock market is just one of many factors in the Fed’s decision making.

Bond yields have been pressured by a variety of forces: strong growth, (somewhat) higher inflation, increased government borrowing, tighter monetary policy, and (to a small extent) the unwinding of the Fed’s balance sheet. However, long-term interest rates abroad remain low, limiting the rise in U.S. bond yields. While the rise in long-term rates has contributed to the stock market readjustment, the drop in the major stock market indices has boosted bond prices (lower yields) in the short run. Still, rising mortgage rates won’t help the housing market, which has been under some pressure due to affordability issues.

Readjustments are a natural (and welcome) part of financial markets. The key is always whether the adjustment has a significant effect on the real economy (most likely, not). We are never “due” for a recession, but the table is typically set for an economic downturn through over-investment or a misallocation of capital. We’re not there yet, but it’s something to watch out for. 

The opinions offered by Dr. Brown should be considered a part of your overall decision-making process. For more information about this report – to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you today.

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates (RJA) at this date and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. Other departments of RJA may have information which is not available to the Research Department about companies mentioned in this report. RJA or its affiliates may execute transactions in the securities mentioned in this report which may not be consistent with the report's conclusions. RJA may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this report. For institutional clients of the European Economic Area (EEA): This document (and any attachments or exhibits hereto) is intended only for EEA Institutional Clients or others to whom it may lawfully be submitted. There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results.

Your Year-End Tax Planning Checklist

Kickstart your tax season planning with this list of important deadlines, relevant documents and strategy considerations.

October 24, 2018

With the end of the year fast approaching, now’s the time to take advantage of tax-deferred growth opportunities, tax-advantaged investments and charitable-giving opportunities, among other strategies. You’ll also want to maximize deductions and credits ahead of tax season.

As you consider these year-end options, sit down with your advisor to review your investments in light of your goals, the tax environment and the economic landscape. The conversation can help identify where adjustments need to be made to position yourself for 2019 and beyond.

Use the year-end tax planning worksheet below to kickstart the conversation and keep you on track throughout the upcoming tax season.

Click “HERE” to view the year end tax planning worksheet

Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Making Sense of Medicare Myths

Take the time to learn the facts behind these common Medicare misconceptions.

October 24, 2018

Retirement planning is complex, at best, but when you throw Medicare into the mix, it can get downright confusing. Many pre-retirees find the program hard to navigate without some guidance. Here are the facts about five common Medicare myths.

Myth One: Medicare offers free healthcare.

Fact: Not quite. The Patient Protection and Affordable Care Act, known more simply as the Affordable Care Act, allows beneficiaries an annual wellness check at no charge. Beneficiaries also are entitled to free recommended preventive screenings, such as mammograms and colonoscopies, annual wellness visits and personalized prevention plans. For most people, Medicare Part A – which covers hospital stays and services up to certain limits – does not require a premium. But that’s it. You’re still responsible for copays, coinsurance and deductibles.

For instance, you’ll pay a $1,364 deductible in 2019 before Part A coverage kicks in for hospital stays of up to 60 days.

Just like health insurance during your working years, the other parts of Medicare also have premiums, copays, coinsurance and deductibles.

• The standard monthly premium for Medicare Part B in 2019 is $135.50.

• You’ll pay more if you’re single and earn more than $85,000 or $170,000 for a married couple filing jointly.

• High earners will face a surcharge ranging from $12.40 to $77.40 per month, depending on income, for Medicare Part D prescription drug plans.

• Many Medicare beneficiaries purchase a Medigap supplemental insurance plan to help cover out-of-pocket costs.

Myth Two: Medicare covers everything.

Fact: Not true. For example, dental, vision and hearing are not covered by Medicare. And prescription drug coverage is only offered through Part D and Medicare Advantage plans. What’s more, you are responsible for the premiums, deductibles and copayments associated with the coverage you choose. However, starting in 2012, Medicare began covering more preventive services, including screening and counseling for alcohol abuse, depression and obesity. Supplemental insurance plans are available to help cover out-of-pocket costs.

Myth Three: A Medicare Advantage plan or Part D coverage will fill gaps in my coverage.

Fact: Medicare can be complicated. Medicare Advantage plans – sometimes known as Part C – offer optional coverage through private insurance companies. Many of these plans cover dental, vision, hearing and prescription drug costs not covered by Original Medicare. However, the plans may have limited networks to keep costs down.

Part D is optional prescription drug coverage that has myriad variables, such as premiums, copays, coverage gaps and coinsurance. You can choose which prescription drug plan best fits your needs.

Myth Four: Medicare may not cover me.

Fact: One major advantage of Medicare is that you can’t be rejected for coverage or be charged higher premiums because you’re too sick. However, if you’re a high earner, you’ll pay higher premiums for Medicare Part B and Part D. In addition, the Affordable Care Act now prohibits discrimination based on a pre-existing condition.

Myth Five: I will be notified when it’s time to sign up for Medicare.

Fact: No. Unless you are already receiving Social Security benefits, you must apply for Medicare. You will not receive any official notification on when or how to enroll.

If you’re over 65, still working and covered by employer healthcare, you may want to delay enrollment in part B to avoid paying for coverage you don’t need. Once you stop working, you must enroll within eight months – even if you’re receiving COBRA or retiree health benefits from your employer – to avoid permanent late penalties. For example, if you miss the deadline, you’ll pay 10% more in Part B premiums for every 12 months you delay. If you are under 65 and retired, you should enroll before your 65th birthday to avoid these penalties.

For those without employer coverage, it’s a good idea to sign up when you’re first eligible for Part B. If you’re eligible for Part B when you turn 65, for example, you’ll want to enroll during your initial enrollment period, the seven-month period that starts three months before your birth month. If you sign up in the first three months, you can avoid delays in coverage. If you sign up during your birth month or later, your start date will be delayed by one to two months.

There’s also a Medicare Open Enrollment period from October 15 to December 7 each year for Medicare Advantage or Medicare prescription drug coverage. During this time, you can:

• Switch from Original Medicare to Medicare Advantage, or vice versa

• Switch from one Medicare Advantage plan to another

• Enroll in a Part D Prescription Drug Plan for the first time

• Switch from one Part D plan to another

• Drop your Part D coverage (you won’t be able to re-enroll until the next open enrollment period, and a late enrollment penalty may apply)

Medicare.gov recommends that you review your current coverage each fall to see if you need to make changes for the following year.

Source: Medicare.gov