(New York)

Most of the indicators that the media is discussing at the moment have to do with a recession (e.g. an inverted yield curve). But today, there is an important one that speaks directly to a bear market—flows in pension funds, insurers, and sovereign wealth funds. There is a combination of factors happening which shows markets have reached the end of this cycle. On the one hand, pension funds and insurers are pulling money out of public markets in order to chase private investments (e.g. real estate and infrastructure). But at the same time, the world’s largest sovereign wealth funds are now pulling out of private market investments because there is too much money chasing too few deals. In other words, valuations have gotten too high everywhere and some of the world’s biggest investors are moving into cash.

FINSUM: When the world’s biggest investors are getting out of both public and private markets, it seems to indicate that the end of the market cycle is near. That said, this bull market has revived itself many times.

(Houston)

The oil market has been doing very well for the last year and a half or so, and has performed especially strongly in 2018, outperforming every major asset class. However, US oil prices fell over 4% yesterday on growing fears of a boost in supply, following a 5% drop last Wednesday. Most of the gains in the market over the last 18 months have been because of coordinated supply cuts by world oil powers. However, while there still are some supply constraint issues on the table (e.g. US sanctions on Iran), the increasing worry is that production may rise more than expected, which would bring prices back down. Further, the US is indicating it may start to use some of its strategic oil reserves in order to avoid another sharp move higher in prices.

FINSUM: To be honest, we have been surprised by how well OPEC has been able to hold the output cut alliance together, so we really should not doubt their ability to continue to do so. That said, we do see at least a plateau coming in prices.

(Washington)

President Trump faced nothing short of public and political outrage in the US yesterday, after he essentially sided with Russia’s view of the 2016 election meddling scandal. When asked about Russia’ alleged meddling in the election, Trump insinuated that he believed Putin’s side of the story more than that of US intelligence agencies (though he did not say this outright). That sparked widespread condemnation from political foes and allies alike.

FINSUM: Whatever you think of Trump’s comments, most might agree that these are some of his most provocative and risky comments yet. The reason being that appearing to “side” with Russia might undermine some of his own nationalist voter base.

(New York)

US financial shares might be in for a quick ride higher. Bank of America’s earnings came in 33% higher than last year, leading to a blowout for the sector. The news followed strong earnings from JP Morgan and Citi. BAML’s shares rose over 4% on the news with one analyst commenting that the numbers were “almost all you could have hoped for”. Rising interest rates were a key factor in the increasing earnings, as banks earned more from net interest margins.

FINSUM: These are great numbers, but they may only be temporary. Consumers have not yet started demanding higher interest payments on savings, but once they do (and we think they will), then banks’ net interest margins will start shrinking again.

(Washington)

Something very odd has been going on in markets for the last few weeks—investors are completely tuning out politics. The political situation both domestically and internationally has grown steadily worse in recent weeks. The US has a growing trade war with China, Brexit is a complete mess, Trump is meddling with allies etc., yet markets continue to move higher. Even emerging markets have rallied.

FINSUM: On top of politics, recession fears are also growing. Accordingly, it is slightly concerning markets are rising. Markets have learned to not take Trump’s comments too seriously, but that lack of sensitivity might be serving investors poorly right now. The Wall Street Journal says it best: “Markets are notoriously bad at pricing changes in the political weather until they are forced to”.

(New York)

The market is currently facing a large number of headwinds: higher rates, a flattening yield curve, a growing trade war, and a high degree of international political tension. Yet, according to Barron’s, the path of least resistance for the S&P 500 may be higher. The reason why? Despite all the hovering the market has done this year, one big thing has fundamentally changed very recently—market breadth is increasing. In other words, the number of stocks which are advancing versus declining is improving. When the market does so, it is often a sign of better things to come.

FINSUM: We do take increasing breadth as a positive sign, as it reflects that investors across all sectors are feeling better and not just a handful hiding out in a few places.

(New York)

When big US banks are worried about lending to the commercial property market, one knows things must be getting bad. Big bank executives say they are unwilling to sign off on a number of deals in commercial real estate as the sector looks overheated. For instance, the CFO of JP Morgan Chase said spreads, a proxy for returns, were “under a lot of pressure”. Big banks like JPM and Wells Fargo have been shrinking their exposure to the sector for some time. Market participants say competition in the space is so high that deals no longer provide good risk-return metrics.

FINSUM: It sounds like commercial real estate is maybe just past its peak and headed for a downturn. All of which appears in direct contrast to the residential property market.

(New York)

Anybody who is worried about a pending bond bear market might take some solace in recent news. Bond markets are becoming increasingly skeptical of the Fed’s bullish stance on the economy, and traders believe there won’t be nearly as many rate hikes as the Fed says. The US has just seen a weak inflation report, and a flattening of the yield curve, both at home and in the Eurodollar market, spells ill for the economy. So while the Fed says it will continue to hike rates into 2020, top market analysts are saying things like “The markets are telling us that there is a pretty high risk of economic slowdown or recession at the end of 2019” (Janney Capital Management).

FINSUM: We think the economy will definitely start to weaken before 2020. Perhaps we will not have a deep recession, but we definitely don’t think there will be continuous hikes for the next year and a half, which is good news for bonds.

(New York)

There is no denying it, small cap stocks are having their moment in the sun. The Russell 2000 is up over 10% this year, while the S&P 500 is up only 3.2%. A number of factors are powering them: tax cuts that benefit small companies more than large ones, better US than overseas growth, and a rising Dollar amid heightening trade disputes. In light of this, the WSJ has picked 3 small cap stock funds for investors to consider. They are: DFA US Small Cap Value Portfolio, T. Rowe Price QM U.S. Small-Cap Growth Equity Fund, and the Harbor Small Cap Value Fund.

FINSUM: Reading about their strategies, the T.Rowe offering looks particularly interesting and has the best five-year annualized return of 14.6%.

(New York)

In what certainly seems to be a sign of health for the industry, RIA average account sizes just hit a new high. The average client at a US RIA now has an account averaging $2m (at firms with over $250m in AUM). This is the first time the figure has ever crossed the $2m threshold. Median AUM for firms grew over 16% in 2017, with average revenue increasing to $3.6m. The stats come from an annual Charles Schwab survey, with the firm saying about the healthy results “Firms are fueling their organic growth by differentiating and marketing their value propositions, improving the client experience and strategically expanding their service offerings to meet the needs of their ideal clients”.

FINSUM: The fiduciary duty of RIAs seems to be a differentiated and continued source of new client demand. It is a testament to the quality of RIAs in this country.