September 1, 2017
By Steve Blumenthal
“No act of kindness is too small. The gift of kindness may start as a small ripple
that over time can turn into a tidal wave affecting the lives of many.”
The car is loaded with clean clothes and dog food. I’m heading out mid-morning to help load a support truck headed for Houston. Thankfully, my kid’s school has organized the donation drive. It has been heartwarming to watch the countless random acts of kindness in the wake of the current challenges. Much more will be needed in the days ahead. Hang in there, Houston. Across the country and from many parts of the world, a tidal wave of kindness is coming your way. Our collective thoughts and prayers are with you.
Houston’s economy is the fourth largest in the U.S. From an economic perspective, the damage will create a short-term drag on U.S. GDP. Longer term, as the insurance funds kick in, the rebuild will provide an economic boost. Overall, like storms past, it will be a temporary economic bump. Following are a few charts I found interesting and hope you do as well:
Looked at through a global lens, Houston produces more than Sweden, Poland, Norway and South Africa.
The damage and impact is immense. Here is a look at the amount of rain received in just seven hours.
In the wake of Hurricane Harvey, Credit Suisse lowered its Q3 and Q4 GDP forecasts. Here is what CS thinks in terms of economic boost. Note pickup in Q12018 estimate.
Nonetheless, I believe the U.S. economy will remain stuck around 1.50% to 2% annual GDP growth for some time to come. If GDP growth comes from the number of workers and their collective productivity, then this next chart showing U.S. population growth should prove to be a headwind.
Bottom line: Expect the overall trend in U.S. GDP growth to remain low for some time to come. Fewer workers, producing fewer things is not good for growth. Current high global debt and aging demographics will keep growth lower for longer. Economic growth has a high correlation with corporate earnings growth. The equity market remains richly priced and earnings growth is unlikely to change that picture any time soon.
Switching gears, this next chart advises to beware of a slip in September:
Buy a September dip? As you’ll see in the Trade Signals section below, the weight of collective evidence continues to support the continuation of the equity bull market trend. You’ll find a number of my favorite indicators, such as the Ned Davis Research CMG Long/Flat Index, Don’t Fight the Fed and a chart that measures Volume Supply vs. Volume Demand. Bottom line: Should September prove as challenging as periods past, despite the second highest valuation level in history, I remain modestly constructive on equities.
Also, I share with you a short but thoughtful piece from my friends at 720Global. They compare the current Fed stimulus QE period of current policy to the prior three and ask “How Much is Too Much?” Wait until you see their chart. Forward we look and consider, “… the ramifications of a Fed that continues to increase the Fed Funds rate and moves forward with plans to slowly remove QE.”
I believe the trend data can help you both participate in growth and protect against material downside loss. In the Trade Signals section, I share a dashboard that color codes (green is good, red is bad) various market, sentiment and economic indicators. It helps me stay centered on evidence and remove emotion. I hope it helps you as well. See important disclosures below. Not a recommendation to buy or sell any security.
♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦
Follow me on Twitter @SBlumenthalCMG.
Included in this week’s On My Radar:
- “How Much is too Much?”
- Trade Signals — Gold Looks Good
- Personal Note
“How Much is too Much?”
Like periods past, we have to wonder what investment behaviors such periods create.
The amount of monetary stimulus increasingly imposed on the financial system creates false signals about the economy’s true growth rate, causing a vast misallocation of capital, impaired productivity and weakened economic activity.
Federal Reserve (Fed) stimulus comes in two forms as shown above. First in the form of targeting the Fed Funds interest rate at a rate below the nominal rate of economic growth (blue). Second, it stems from the large scale asset purchases (Quantitative Easing -QE) by the Fed (orange). When these two metrics are quantified, it yields an estimate of the average amount of stimulus (red) applied during each post-recession period since 1980. It has been almost ten years since the 2008 financial crisis and the Fed is applying the equivalent of 5.25% of interest rate stimulus to the economy, dwarfing that of prior periods.
The graph highlights that the Fed has been increasingly aggressive in both the amount of stimulus employed as well as the amount of time that such stimulus remains outstanding. Amazingly few investors seem to comprehend that despite the massive level of monetary stimulus, economic growth is trending well below recoveries of years past. Additionally, as witnessed by historically high valuations, the rise in the prices of many financial assets is not based on improving economic fundamentals but simply the simulative effect that QE and low interest rates have on investor confidence and financial leverage.
Now consider the ramifications of a Fed that continues to increase the Fed Funds rate and moves forward with plans to slowly remove QE.
Click here for the full piece.
Trade Signals — Gold Looks Good
S&P 500 Index — 2,446 (8-30-2017)
Notable this week:
J.P. Morgan said, “Gold is money. Everything else is credit.” Currently, gold looks good. Both our intermediate and short-term signals remain buys. Investor sentiment has improved. The overall trend evidence for equities remains bullish as does the trend for high quality bonds (the Zweig Bond Model continues to signal lower interest rates and higher bond prices). Our CMG Managed High Yield Bond market trend indicator is in a sell, signaling caution on high yield bond exposure.
We continue to see a “risk on” positioning in the CMG Opportunistic All Asset Strategy with overweight exposures to international developed and emerging market ETFs. For clients, more on that in the Update on CMG Investment Strategies section below.
Important note: Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for the latest Trade Signals.
Years ago I used to send a small book that shared stories of Random Acts of Kindness. When I was talking to my sister Amy this week she told me how she quietly tries to do at least one kind act per day.
“No act of kindness is too small. The give of kindness may start with a ripple that over time can turn into a tidal wave affecting the lives of many.”
My mom taught me, “The more you give, the more you get.” I think that is a universal law. It sure makes you feel good. I thought about her when I was talking to Amy. No act of kindness is too small. I’m going to try to be more like Amy.
I’ll heading to Chicago next Tuesday to attend the Morningstar ETF Conference on September 6-8. If you are attending, please send me a quick note. I’d love to connect.
Dallas follows on September 20-21. John Mauldin along with his team of four ETF strategists are presenting to a select group of independent advisors. John will share his outlook, one he calls the “Great Reset” and his approach to navigating the period ahead. We are one of the four strategists he selected. You can also learn more here. The October advisor event is scheduled for October 25-26. Email firstname.lastname@example.org if you’d like to attend.
Wishing you a wonderful holiday weekend with spirits held high. Fire up that grill and grab an ice cold beer (for me an IPA). Send some love to Houston and celebrate with those you love most. September 1… hard to believe. Time is moving by much too fast.
♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦
With kind regards,
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
If you find the On My Radar weekly research letter helpful, please tell a friend … also note the social media links below. I often share articles and charts during the week via Twitter and LinkedIn that I feel may be worth your time. You can follow me on Twitter @SBlumenthalCMG and on LinkedIn.
I hope you find On My Radar helpful for you and your work with your clients. And please feel free to reach out to me if you have any questions.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
The objective of the letter is to provide our investment advisors clients and professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and client communication.
Click here to receive his free weekly e-letter.
Social Media Links:
CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. We launched CMG AdvisorCentral a year ago to share our knowledge of tactical investing and managing a successful advisory practice.
AdvisorCentral is being updated with new educational resources we look forward to sharing with you. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.
A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
IMPORTANT DISCLOSURE INFORMATION
Investing involves risk. Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. or any of its related entities (collectively “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. 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 advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in King of Prussia, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures.