Never in my career have I experienced such a poorly accepted bull market. As I sit here in my Pasadena office writing this letter, I am amazed at the market returns for the year. US Markets are up 23.12% with US growth outpacing value 25.77% to 19.04%. Yet, people are still finding reasons to be pessimistic—and perhaps, they should? If it’s not the trade war with China, it’s the cost of college and loan defaults, or the inflation in automobiles and lengthening of loan terms, or the housing market and the unaffordability of homes for middle class Americans. According to the news, middle class Americans can’t afford a home close enough to their work and can’t afford a new car to drive them there. On top of that, there is also the repo market.
The Market in the News
On August 20th, 2019, the Wall Street Journal published a blog post on the RV industry in Elkhart, Indiana, where most RVs and associated parts are made. Interestingly, the post explained that the city and the RV industry as a whole are one of the better indicators for a looming recession. According to the article, the industry is “flashing warning signals” based on waning demand for luxury items like Winnebago. Funnily enough, the stock of the largest RV maker, Winnebago (Ticker WGO), is up over 16% in the last 2 months.
The repo market, short for repurchase agreements, is simply one bank lending another bank money overnight. When a bank lends out money to a consumer, commercial, or human, there are reserve requirements on the bank, meaning that only a portion of the money deposited into the institution can be loaned. The higher the reserve requirement, the less it can lend as a ratio of deposits/loans. If a bank lends out too much in a given day, it has to borrow to meet those requirements. Normally, other banks are willing to lend overnight and collect a small amount of interest. However, recently the banks stopped lending, forcing the Fed to make a market and become the lender. Again, this is the function of the Fed as the lender of last resort.
Now, the Fed has also lowered interest rates another quarter percent. Taken as a whole, we could view this as a bearish signal on the economy. Add in slower global economic growth and the threat of a no deal Brexit and/or tariff wars lasting longer than we expect, and no wonder we are all a little concerned.
What I’m Watching
- Big tech earnings such as AAPL and Amazon
- SoCal home sales rose 10.4% in year ending September 2019
- Gaming industry companies
- Short term municipal bond rates. If we see a spike it could mean smart money is leaving the game
Quarterly Wealth Tip: Know what you own. Taking profits is a good thing. Defer or eliminate taxes when you can.
On a Personal Note
From November 18 – 22, I will be out of town attending my wedding! I will however check in with the office daily. If there is something urgent, please email the office, and Claudia Ruiz can help.
Philip Clark, CFP® | Director – Wealth Management