Today the market, as measured by the S&P 500, is down 1.63% (as of 3:35pm EST) on a renewed (and completely irrational) fear of a yield curve inversion (which has not occurred and is extremely unlikely to occur in the intermediate future) and the fear of worldwide global slowdown and growth. Here are the facts that indicate strongly that the markets newfound fear is as irrational now as it has been every time I’ve seen it in the past 31 years of managing money professionally.
FIRST TO THE FALSE BELIEF OF YIELD CURVE INVERSION
With the Federal Reserve announcing this past Wednesday that they have no intent to raise short-term rates for the remainder of the year, it is virtually impossible to realize any yield curve inversion for a very long time.
Since our market low call, the average return of our Spectrum client accounts, after deduction of all costs, through yesterday’s close is 21.44%. Yes, that’s 21.44% since we called the market low on December 24th of 2018. That’s an amazing return for a period of three months! Giving up some of that today does not harm us and definitely does not change the economic growth scenario that we understand is most likely.
Fears of yield curve inversion have also significantly negatively affected our firms bank holdings today as they have fallen an average of 3.90% (as of 3:37 pm EST ). This has created questions in many minds about whether banks are even a long-term solid holding. So let’s look at how it has affected our top two bank positions.
In the case of CitiGroup, through yesterday’s close, we were up 23.76%! This is extraordinary, and if today’s irrational fear costs us a few percent, we are determined to ride that out, or buy more of this significantly undervalued sector. Our second largest bank position, Bank of America Merrill Lynch, is up 18.63% year-to-date.
The catalysts for positive market and bank holding price movement are many. First, we know that the end of next week we have a government delegation going back over to China. We also know there is a scheduled meeting, for the President of China and President Trump, in Mar-a-Lago at the first of April. I may be off base, but I’m pretty sure that means our country is likely to sign a trade agreement with China during President Trump’s Man-a-Lago meeting. That agreement should resolve the majority of the trade, currency, and industrial theft issues that have plagued the two largest economy’s in the world, (the United States and China) will have a dramatic effect not only on those two economies’ but on the world’s global economy as well. This is a short-term, and long-term, positive catalyst!
The second catalyst is that literally within days, we believe that the long-awaited Mueller report (which has cast a shadow on our markets and politics) will be released. It will, we believe, be a complete nothing burger and result in a total exoneration of any false and silly claims that the President of the United States, or his family, colluded in any way with a foreign government.
I served with patriots for 25 years in the United States Air Force. The men and women that I had the privilege to serve alongside, both here and abroad, are of the highest caliber and are true patriots. It is my considered opinion that President Trump is no less patriotic than those I served with. I believe the Mueller report will fully exonerate this patriotic man who laid down a life of luxury for the incredible hardship and torture we cast upon our leaders in this, the world’s greatest country.
The third short-term catalyst that will reverse (again) hysterical market fears will be a rapid revival in worldwide economic growth as the world’s top two economies, the US and China, resolve differences that lingered and grew over longer than a 30-year period. The past leadership of our country refused to confront China over its policies for many decades. We believe that the Trump administration has made tremendous progress, that a comprehensive agreement will be signed around the 1st of April, and that markets will rapidly reflect this reality in an extremely positive and powerful way.
A fourth catalyst in a smaller still very important way, is bringing our kids home, with real victory under our belts, following the humiliating defeat of ISIS. The last small village in Syria that had any ISIS fighters in it saw ISIS defeated earlier this week. When all is said and done, we will maintain a very small contingent of troops in Syria, a much-reduced footprint and smaller troop allocation in Afghanistan and maintain significant forward basing in Iraq from which we can respond to any terrorist threat in the Mid-East. When I returned from Iraq in 2015, I sent a letter to all of you stating that all we had to do to decimate and defeat the greatest terrorist threat ever known to man, ISIS, was to change the Rules of Engagement and allow our troops to defend themselves and fight these agents of evil and terror. That’s exactly what President Trump ordered and now, with the threat defeated, we will at last realize a peace dividend. This fourth catalyst is immediate and will provide significant economic benefits in the reduction of not only our country’s expenditures, but in the wasting of precious American blood.
To sum it up, nothing that’s going on in the markets today makes a lot of sense. What does make sense is how long-term earnings growth pushes up the value of your investments, as it has dramatically since we called the market low in a letter to you (on December 24th, 2018). Corporate earnings gains are real and are extremely likely to experience prolonged, additional upside movement.
With the catalytic events we’ve discussed above, patience and discipline as investors (which our firm definitely has!), and a continued economic revival (and near miracle) in our domestic economy and trade relationships, we believe that we are on the cusp of multi-year and dramatic period of upside movement in the outstanding companies that are currently held in your account. Patience is its own reward, and the lack there-of causes waste, pain, and financial losses. Please know that every day we are monitoring your holdings. We watch every news event that effects our individual portfolio elements and study carefully, on an ongoing basis, the big picture view of what is happening in our domestic and in the international economies. This is what informs our holdings and is what has given our long-term clients significant returns. This is also what will provide you with safety and security going forward. Our portfolios are performing well, we’ve got it, so please enjoy your wonderful life and leave any worry to us.
C. Kelly Buckley, MBA, CFPâ
Managing Director for Asset Management