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STA Weekly Report – Are You Prepared for The Fourth Industrial Revolution?

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INSIDE THIS EDITION:
Are You Prepared for The Fourth Industrial Revolution?
Weekly Technical Commentary
Major Stock Indexes Continue to Test Overhead Resistance
Small Caps and Transports are Testing 200-Day Lines
MSCI EAFE Shares are Testing Resistance Lines
401k Plan Manager*Updated on 12/31/2018

Since it was first introduced at the annual meeting of the World Economic Forum in 2016, the fourth industrial revolution, or industry 4.0, has been among the hot topics in academia, amongst politicians, and between business leaders.

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What is the fourth industrial revolution? The term was coined by professor Klaus Schwab, the founder of the World Economic Forum. In his book, Schwab presented his vision of the fourth industrial revolution as a “technological revolution that is blurring the lines between the physical, digital, and biological spheres.”

The development of modern industries has been powered by four revolutions that share a common theme: an outburst of technological innovation that has fundamentally changed society. The first industrial revolution started in Great Britain around 1760 and spread to Europe and North America through 1800. It was powered by a major invention: the steam engine. The adoption of steam power redefined manufacturing processes, led to the creation of factories, and fueled a boom in the textile industry. The second industrial revolution, starting around 1870, was marked by mass production, electrical energy, and the birth of new industries such as steel, oil, and electricity. The key inventions of this era were the light bulb, telephone, and internal combustion engine. The third industrial revolution, also known as the digital revolution, occurred during the second half of 20th century and was marked by the semiconductor, personal computer, and the internet.

Source: www.sustained-quality.com

What separates Industry 4.0 from the other three that preceded it?

First, technological changes now happen faster than ever. For example, it took 75 years for 100 million users to adopt the telephone, while Instagram reached the same milestone in 2 years. Second, the magnitude of technological innovation is unprecedented. A 2017 report by the European Patent Office (EPO) showed that more than 5000 patent applications for inventions related to the fourth industrial revolution were filed at the EPO in 2016 alone, growth of 54% over the last three years. Third, technology is so intertwined with other sectors that it is almost impossible to find a “non-tech” company. Fourth, technology is so ingrained in our day-to-day lives that it is changing the way we live, work and relate to one another. Lastly, the gap between the digital, physical and biological worlds is increasingly blurred. Voice-activated virtual assistants, facial ID recognition and healthcare sensors are all good examples. The Fourth Industrial Revolution is disrupting almost every industry in every country and creating massive change.

According to Boston Consulting Group (BCG), nine technologies are the building blocks of industry 4.0. Together, they are not only changing, but transforming, industrial production leading to greater efficiencies and changing traditional relationships among suppliers, producers, and customers. The nine technologies include big data and analytics, autonomous robots, simulations, horizontal and vertical system integration, the industrial internet of things, cybersecurity, the cloud, additive manufacturing, and augmented reality. 

Source: BCG Analysis

The fourth industrial revolution is no longer in the conceptual or early development stage. McKinsey & Company has identified global factories that have taken Fourth Industrial Revolution technologies and integrated them at scale. These companies are leveraging the principal drivers of the Fourth Industrial Revolution to transform connectivity, intelligence and automation. In the process, they are also realizing significant financial and operational benefits.  

Source: McKinsey Global Institute Analysis

The same report also showed a remarkable gap between companies that adopt artificial intelligence (AI) early and those that don’t. Because the competitive advantage enjoyed by those early adopters far outweighs the high transition costs and capital expenditures, these companies have managed to take the lion’s share of the benefits available from increased productivity.

The fourth industrial revolution not only brings greater promises but also great risk. Every industrial revolution eliminates some jobs while creating demand for new jobs and skills. However, the current revolution may ultimately create a job market that is segregated into “low-skill/low-pay” and ‘high-skill/high-pay” segments. Additionally, research shows that innovators, investors, and shareholders stand to benefit the most from the fourth industrial revolution. Therefore, innovation might also potentially make inequality, which is already a big issue, even worse. As such, world governments need to adequately plan for the socioeconomic changes brought by the fourth industrial revolution and investors need to be aware of their implications.

Major Stock Indexes Continue to Test Overhead Resistance

After having one of the strongest starts to a new year in history, major stock indexes find themselves testing yet another potential overhead resistance barrier. And they’re doing so while in an over-extended technical condition.

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But they’ve been looking over-extended for most of the past month. Chart 1 shows the Dow Industrials testing their early November intra-day high at 26,300 (first red circle). A decisive close above that previous peak would clear the way for a retest of last October’s record high. But it has to clear its November high first. The Dow remains above its 200-day moving average (red line). Its blue 50-day average, however, remains below its 200-day line. On a more positive note, its 20-day average (green line) remains above the other two longer averages. If the Dow does pull back, that would be the first moving average to be tested. One cautionary note is fact that its daily MACD lines (lower box) have been converging over the last month and are close to turning negative. That would be their first time in negative territory since the end of December. That might be enough to signal some short-term profit-taking. Or possibly a period of consolidation to work off its overbought condition. 

Chart 2 shows the S&P 500 in a similar technical condition. The SPX is testing its November intra-day high at 2815. If it does pull back, it could retest its 20 and 200-day averages (green and red lines).

Chart 3 shows the Nasdaq Composite Index also testing its November intra-day high at 7572. The lower box in Chart 3 shows its MACD histogram bars in danger of falling below their zero line (red circle). That would signal that the MACD lines themselves are turning negative.

Small Caps and Transports Are Testing 200-Day Lines

Two other economically-sensitive stock indexes are testing overhead resistance. Chart 4 shows the S&P 600 Small Cap Index testing its 200-day average (red line) and its early November peak at 994. Small caps have a history of leading larger stocks up and down. So their current test of the red resistance line could be important for both.

Chart 5 shows the Dow Transports also meeting some resistance at its 200-day average (red line). The direction of the transports often has a bearing on the Dow Industrials. So the current test of its 200-day average could affect both.

MSCI EAFE Shares Are Testing Resistance Lines

Foreign stocks are also off to a good start for the year. With emerging markets in the lead. This week the MSCI Emerging Markets iShares (EEM) cleared their 200-day average with a lot of help from a rising Chinese stock market. Foreign developed markets are also rallying. But they’re up against a couple of resistance barriers. Chart 6 shows the MSCI EAFE iShares (EFA) testing its red 200-day moving average. But it’s also up against a falling trendline drawn over last January and September highs. Needless to say, a decisive close above both resistance lines would be a bullish development. The EAFE includes developed stock markets outside of the U.S. and Canada. Its biggest foreign holdings are in Japan (23%) and the UK (16%) with another 19% in France and Germany combined.

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Mike Smith, President

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

What is Asset Allocation and How Do I Integrate it into My Financial Plan?

Written by: Scott Bishop, MBA, CPA/PFS, CFP®

As a long-time financial planner, I find it very important to make sure that a client’s portfolio is aligned with their overall financial plan. Many investment advisors or planners try to figure out a client’s portfolio allocation via a questionnaire. Although some questionnaires are good and some are bad, I feel that the best allocation can only be determined if it is coordinated with their overall financial planning goals and objectives. Many investors (and even financial advisors) use allocation targets to try and beat benchmarks like the S&P 500. However, how is beating a market a true goal in and of itself? Shouldn’t trying to have a higher probability of meeting or beating their financial goals and objectives be the true “benchmark” or goal of your or anyone’s portfolio?

Read Full Article Here

Important Disclosure:
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 STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  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 article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  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.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

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