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Executive Summary

Stock market hype or the stock market cycle, which is more important? As I have written many times before, the financial media is biased toward a positive (hype) slant – even if it means picking individual data points while ignoring the overall picture of the market cycle. For instance, the news regarding President Trump’s meeting with China’s president focused on positive hype even though nothing really changed. Much of the corporate data on earnings point to lower results as well as a decline in manufacturing activity. The financial data does not support the stock market highs being hyped in the media. Please proceed to The Details to remind oneself of the importance of the market cycle.

The Details

It seems lately the “hype” is attempting to reach “all-time highs.” Those who listen to financial media understand the excitement exuded by pundits when they are able to proclaim: “the best start to a year since Adam and Eve.” However, they conveniently exclude the fact that last December was the worst December in the history of the stock market. Last week it was exuberance over the best June since the 1950’s. Of course, they left out that May was the worst may since the 1970’s.

Cherry-picking data-points and attempting to focus on the short-term minutia instead of the “Cycle” will leave many investors suffering regret. Over this past weekend, President Trump met with China’s President Xi Jinping at the G-20 meeting in Japan. After the meeting the excitement of a “Trade Truce” couldn’t be contained. What exactly is a Trade Truce? It means, overall, the status quo! Nothing really changed. The U.S. agreed not to implement increases to existing tariffs – meaning they remain where they were. No real resolution, yet the futures markets were completely giddy.

All of the hype is intended to take the attention away from the deteriorating global and domestic economies, and expected decreases in corporate earnings. Darius Dale of Hedgeye Risk Management, LLC wrote the following in today’s (Monday) Early Look newsletter:
“Is now the time in the The Cycle to chase a fledgling rotation out of quality, large-cap growth and into levered small caps that don’t have ‘secular’ growth curves to get excited about in Wally World price-to-sales multiple turns?
We don’t think so. If anything, this morning’s global economic data should serve as a stark reminder that the global industrial cycle continues to deteriorate at a ‘worse than expected’ pace amid a broadening earnings recession here in the US:
  1. China Manufacturing PMI flat at 49.4 in JUN
  2. Japan Manufacturing PMI ticked down to 49.3 in JUN from 49.5 in MAY
  3. Eurozone Manufacturing PMI ticked down to 47.6 in JUN from 47.7 in MAY
  4. Australia Manufacturing PMI ticked down to 49.4 in JUN from 52.7 in MAY
  5. Russia Manufacturing PMI ticked down to 48.6 in JUN from 49.8 in MAY
  6. Indonesia Manufacturing PMI ticked down to 50.6 in JUN from 51.6 in MAY
  7. Taiwan Manufacturing PMI ticked down to 45.5 in JUN from 48.4 in MAY
  8. South Korea Manufacturing PMI ticked down to 47.5 in JUN from 48.4 in MAY
  9. South Korean Exports decelerated to -13.5% YoY in JUN from -9.5% in MAY
  10. 18 of 497 S&P 500 constituents have reported Q2 earnings thus far with EPS growth tracking down -18.3% YoY on an aggregated basis and every sector in the red
While some investors might prefer to wait for President Trump to put out the next fire he has yet to start, we prefer to take our cues from The Cycle.”
Which is more relevant to long-term stock market performance, tariff hype or economic and earnings cycles? We believe the cycle will win in the end, and the current cycle is in the process of concluding.
As reported on Zero Hedge,
“It’s a bloodbath. No matter where you look, global manufacturing surveys are signaling growth is over (and in most cases, outright contraction is upon us).
JPMorgan’s Global Manufacturing PMI fell to its lowest level for over six-and-a-half years and posted back-to-back sub-50.0 readings [contraction] for the first time since the second half of 2012.”
posts chart 2
 Weakness is rearing its ugly head in many sectors. Additionally, corporations have continued “talking down” their expected earnings. These recipes are not supportive of “record high stocks” and their related valuation levels.
For some reason, investor’s financial memory tends to be very short. Those in the markets after the Technology Bubble burst in the early 2000’s soon forgot about the pain into the lead-up to the Real Estate Bubble and subsequent Financial Crisis and Great Recession. Ten years after the crisis and following unprecedented monetary policy ($3.8 trillion in QE and zero percent interest rates – yet to be unwound) and stocks are more overpriced than ever before. Even after the worst December in the history of the stock market, all was forgotten by the end of January. The month of May took away close to 7% or more in market gains. Today, nobody mentions it.
It is very likely with deteriorating data broadcasting the end of the cycle is near, most investors will ignore it and listen only to the hype…until it is too late.
The S&P 500 Index closed at 2,942, net flat for the week. The yield on the 10-year Treasury fell to 2.00%. Oil prices rose to $58 per barrel, and the national average price of gasoline according to AAA increased to $2.72 per gallon.
At Prudent Financial, portfolios are developed to take into account the state of the economy, market cycle and valuation, and relative strength. Our goal is long-term growth with limited downside potential.  If you need assistance with your portfolio, please give me a call. I would be happy to review your situation and explain how we can help you work towards achieving your goals.

© 2019. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

Securities offered through First Heartland Capital, Inc., Member FINRA & SIPC. | Advisory Services offered through First Heartland Consultants, Inc. Prudent Financial is not affiliated with First Heartland Capital, Inc.

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