Recession Fears Seem to be Subsiding

By David B. Armstrong, CFA | Mar 08, 2016 | Weekly Market Commentary

I’ll admit it. I got nothing done this weekend since Season 4 of House of Cards was dumped onto Netflix. It broke the internet and my productivity like a dump truck full of Kim Kardashian derrière posts. So this may be a little short.

However, if this blog does not give you enough of a Monument fix, please be sure to see the great story written by Sara Gilgore at the Washington Business Journal which features Monument as a Cool Office in both an article and a video.

I’ve written several blogs since the beginning of the year highlighting the recession fears and the reasons that we felt they were overblown. For example, take a look at:

1. Economic Review Video: January, 2016
2. There is Definitely a Recession Coming
3. Special Report – The Reason the Market is Down
4. Why the Market is Whipsawing

Following February’s positive jobs report, we think it proves that our assessment of the situation was correct.

Last Friday, the U.S. Bureau of Labor Statistics reported nonfarm payrolls grew by 242,000 in February. That’s way better than the 190,000 new jobs that were expected.

Nice.

Wait, before I move on… both December and January figures were revised modestly higher, too. This means that more jobs were created in those months than previously thought.

Because Kevin Spacey and the re-emerging Neve Campbell (I have not seen her in anything since the 1997 block buster, “Wild Things.” Admit it – if you are a guy, you have watched it at least 18 times.) completely ruined my weekend, I have not yet read all the details of the jobs report. BUT, apparently, even though there were disappointing contents to the report, the jobs and data went a long way in subduing anxiety that the economy was drifting toward a recession.

I get it, and have said it before… It’s not like the economy is firing off like a SpaceX rocket, but tepid growth is better than no growth and in fact, IT IS GROWTH.

It also helps support the idea that falling commodity prices is more about excess supply and not a signal demand is faltering.

There has been a lot of talk about oil, stocks and high yield junk bonds. Let me try to explain.

First, I heard a great saying from an investor a few weeks ago at a dinner that I would like to share. He said, “Dave, there isn’t a stock market, only a market of stocks.” What he meant was that the stock market may be doing one thing but that is not what any particular market (or portfolio) of stocks is necessarily doing. (Thanks P, we look forward to a spring golf outing.)

This leads me to my next paragraph…

Our Asset Management Associate, Spencer Rand, came across an interesting “factoid,” as he called it. Carlyle Group pointed out that if you remove the ‘FANG” stocks (Facebook, Amazon, Netflix, Google), the annual return of the S&P 500 for 2015 drops from a positive 1.4% to a negative -2.8%. It’s not riveting analysis, but it’s significant. If you didn’t own these stocks last year, it will explain why you may have underperformed the S&P 500.

Looking for a gauge for how oil has impacted the general investor sentiment? Look no farther than the chart below from Charles Sherry.

See the red line? It shows how the recent bottom in the S&P 500 Index corresponds with the recent bottom in oil prices.

Now for High Yield 101. Remember, there is an inverse relationship between the price of bonds ($) and their yield (%). When bond prices fall, their yields increase and vice versa. That’s as deep as I want to go on that for the purpose of explaining the below chart (also thanks Charles Sherry – you always put out great charts).

The left-hand side (brown line and numbers) is simply the difference between the average junk bond yield and yields on Treasury bonds of similar maturities. It’s often used as a measure of risk.

Note: The BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread is the index for the left-hand side of the chart. It is an unmanaged index which cannot be invested into directly. Past performance does not guarantee future results.

A higher number means people are selling junk bonds (driving the yield higher because of the inverse relationship) and using that money to buy safer treasuries (driving the price up and yields down). That means people are trying to get safer with their money because they are scared. When the brown number is going down, it means people are selling treasuries and using the money to buy junk bonds, taking on more risk.

Once oil prices started falling, it created a perceived problem for junk bonds because investors got scared that the energy company junk bonds would default. But then when you take a look at the red line you see that the brown numbers started getting smaller at the same time that oil turned around…which means investors started to buy back into riskier debt.

In fact, Lipper reported U.S.-based junk bond inflows (a fancy way of saying that investors were buying back into the junk bonds) for the week ending on March 2nd were the highest on record (according to Reuters).

Basically, tighter credit conditions shown by the rising brown line can impede lending to businesses. This adds to anxiety and economic activity tends to stall.

However, the opposite is true too. If the spreads continue to compress, shown by a lowering brown line, it should be viewed as another positive sign for the economy.

Please call or email with questions. We are happy to answer them but will not spoil House of Cards for you…go watch it.

Important Disclosure Information for “Recession Fears Seem to be Subsiding “

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.