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STA Weekly Report -Macroeconomic Environment Still Presents Opportunity

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INSIDE THIS EDITION:
Macroeconomic Environment Still Presents Opportunity
Russell 2000 Small Cap Index is Trying to Clear Its 200-Day Moving Average
Energy Stocks Are Trying to Clear Their 200-Day Line
Banks Are Holding the XLF Back
STA Money Hour, Upcoming Special Guest Mary Beth Franklin, CFP®
401k Plan Manager*Updated on 12/31/2018

Macroeconomic Environment Still Presents Opportunity

As investors know, taking the pulse of the broad economy is important for making investment decisions. In fact, it is the reason why at STA Wealth Management we use macroeconomic analysis as one of our three major analytical disciplines. Part of the work we do on the economic front is to try to understand where we are in the business cycle as this can also influence Fed policy decisions. 

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There are several phases to a normal business cycle and identifying the one we are in can help position portfolios for any inflections ahead.

Source: KB Research

We have said for quite a while that it looks to us like we are in the tail end of the current expansion as the data seems to certainly be showing some signs of deceleration. Take for example the Conference Board’s Leading Economic Indicators Index. That index, updated through the end of March, showed a slowdown in momentum, at least on a YoY basis.

However, a deceleration does not mean that those indicators have turned negative – at least domestically. Looking at 12 variables that historically have been indicative of a looming U.S. Recession there are very few that as of the end of March are negative. In fact, the only variable that is showing a recessionary condition is the yield curve, which recently saw an inversion over parts of the curve.

Source: Legg Mason

It is important to note that although an inversion has been present recently, the signal is not necessarily statistically significant. Some research indicates that for the yield curve inversion to really matter from a statistical significance stand-point it must persist for at least three months – a condition that has not materialized to date.  This means that the yield curve inversion may just be a false positive like the one we have seen more than once before.

Source: https://fattailedandhappy.com/

That said, we believe some caution is still warranted. Especially in the face of a double-digit stock rally to start the year. That combined with a Philly Fed Index that suggests that U.S. GDP could slow in the coming months, investors would be wise to keep the temptation to performance chase in check.

Source: Legg Mason

Additionally, outside of the United States, economic headwinds are present. Take for example developed international markets which have seen the uncertainty of BREXIT persist without resolution. This, combined with technical recessions in large European countries like Germany, paint a more fragile economic picture in the developed world.

Of course, as believers that global asset allocation is important, we must be aware that the macroeconomic picture outside of the United States is nuanced and different at the country level. For some context, we believe that emerging markets may present one of the most attractive opportunity sets going forward. However, being selective is important as each country poses a different set of risks.  That is why we believe to take full advantage of opportunities in emerging markets investors must be disciplined, aware of the risks, and more importantly accept that volatility is likely.

Russell 2000 Small Cap Index is Trying to Clear Its 200-Day Moving Average

AVERAGE… Last Wednesday’s message showed the S&P 400 Mid Cap Index clearing its 200-day average; and suggested that left only the small caps to join the market rally.

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That may be about to happen. Chart 1 shows the Russell 2000 Small Cap Index sitting right on its red 200-day line. A decisive close above that red line would a positive sign for smaller stocks, and would broaden out the market rally. A few other market groups are either trying to clear their red line, or stay above it. That includes airlines, energy, and financials.

Energy Stocks Are Trying to Clear Their 200-Day Line

Crude oil has gained 40% this year and recently cleared its 200-day average. Chart 2 shows the Energy Sector SPDR (XLE) trying to do the same. The Energy Sector SPDR (XLE) is the only S&P sector to remain below its 200-day line. That’s because the Financial SPDR (XLF) cleared that red line last week.

Banks Are Holding the XLF Back

Chart 3 shows the Financial Sector SPDR (XLF) trying to hold last week’s breakout above its 200-day moving average. Falling bond yields (and a flat yield curve) have been cited as the main factor holding financials back. That’s especially true of banks. Falling bond yields make it harder for banks to charge higher rates for their loans. Which explains why banks have been one of the weakest parts of the financial sector. Chart 4 shows the KBW Bank Index ($BKX) still trading well its 200-day line. But there’s a more positive side to that story. Falling bond yields have pulled mortgage rates lower, which has boosted mortgage and refinancing applications. Chart 5 shows the Dow Jones US Mortgage Finance Index already testing their September highs. Consumer finance stocks are also financial leaders. That may offset some of the drag from bank stocks.

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)

Upcoming Special Guest, STA Money Hour
Thursday, April 25th at 12:00pm on AM950

Mary Beth Franklin, CFP®

Nationally recognized social security and retirement planning expert, Mary Beth Franklin, CFP will be our guest during STA Money Hour, Thursday, April 25, Noon-1:00 PM on AM 950.  Scott Bishop, STA Wealth Management head of financial planning, will interview Ms. Franklin to explore new tax laws and upcoming changes in social security filing strategies. Ms. Franklin lasted visited the show in 2016 (Podcast of 2016) and was widely received. We are welcomed to have her back. It should be a great show!



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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