Are We There Yet?

January 28, 2019

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

It is well documented that the fourth quarter of 2018 was one of the roughest on record for equity markets, culminating in the worst Christmas Eve performance ever. So then what happened? After a market holiday on the 25th equities rebounded with one of the strongest ‘day-after-Christmas’ performances on record. The Russell 3000 jumped 5.00% in a single day. The same computer trading that ruined Christmas and ruined December and ruined 2018 was in gear again, only this time on the buy-side of the equation. As of Friday, the 25th of January, the Russell 3000 had gained all of the ground lost since December 7th of 2018. It had risen on 17 of the 21 trading days, regaining its 50-day moving average and a significant support level.

Since this major correction started in early October, U.S. economic numbers remained positive. Trade tariff talks have continued. The Wall still isn’t built. The Federal Government closed and reopened, and the Democrats and Republicans are still behaving like the Hatfields and the McCoys. None of the aforementioned suspects deserve credit for the correction, or the recovery rally. The size of the market moves, the volume, and the excessive volatility all point to high-speed computer trading programs, which remain poorly understood by regulators and even more poorly regulated. Until they take the time and invest the energy to get a handle on this type of trading, it is going to be an unpleasant fact of life for equity investors.

Equity markets that were deeply oversold are now steeply overbought. This does not mean that the Christmas Eve lows need to be revisited. They were artificially acquired, being established in too short of time with too little supporting data. The recovery rally, while not as rapid as the late December decline, has been a relative mirror in percentage degree. While the entire sequence has been frustrating in terms of lost opportunity and wasted time, the major Bull Market that has been in place since 2009 remains intact.

After the initial October correction began, equity markets settled into a trading range that contained prices for approximately six weeks. It would not be surprising to see equities once again enter a trading range, consolidating the recent recovery rally, before readdressing the initial correction. Domestic equities continue to lead from a global perspective, as the entire world’s equity markets were affected by the selling. Emerging markets equities actually made technical advances as they broke long-term downtrends during the recovery rally and rapidly regained important moving averages. For the time being, developed international equity indexes remain pressured by long-term downtrends that extend to early 2018.

Within domestic equities, the defensive sectors experienced positive rotation as capital moved away from technology, finance, and the industrials towards utilities, real estate and consumer staples. Health care also held up well. The sector which came under the greatest pressure was oil and gas, as light crude oil prices declined from a high of $76.90 per barrel on October 3rd to a low of $42.36 on December 26th before rebounding back to the mid $50’s. Oil prices had been climbing steadily for fifteen months prior to the decline and their rapid pullback was very surprising. They now are back in the trading range that contained oil prices for much of 2016 and 2017.

The October correction put the Bull Market onto a detour. The December correction was a secondary detour. The Bull Market’s pace before these detours was slow due to several conditions which remain the same. Are we there yet? Nope. But we are closer to the main road then we were a month ago. The Russell 3000 is now 10% below its all-time high set in October of 2018, having gained back 14% in the last four weeks. Orange barrels still line the road and the speed limit is still 55, but we have gone from 2 to 4 lanes. Hang in there.

© 2019 Edward D. Foy

ed@foyfinancial.com

Sources: Bloomberg, Marketwatch, StockCharts

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Correction Or Bear Market

December 27, 2018

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

To put this market into proper perspective, one needs to go back to September. Remember that September holds the dubious distinction of being the worst performing month of the year, on average, for U.S. equities dating back to 1950. Yet September of 2018 was a positive month, with major market indexes hitting new highs on the 21st before relaxing slightly into the end of the quarter. October 4th was the first of six consecutive down days for the Russell 3000, followed by a three day rally before another sequence of six consecutive down days. The total decline for the Russell 3000 was -11% in 15 days. It was a taste of what laid ahead.

Equities rallied +8.1% over the next seven trading days, establishing a trading range that contained prices for the month of November. The top of the trading range was only 5% below the September highs, certainly within reach of a respectable year-end rally. The bottom of the trading range was successfully tested on November 20th followed by a nice rise into the end of the month. November went into the record books as another winner. The U.S. economy was in good shape with expanding GDP numbers. 3rd quarter corporate earnings were excellent. December has been the best performing month of the year, on average, for U.S. equities, since 1950. The stage was set. It looked like a classic Hallmark Holiday Movie in the making.

The first week of December major markets declined once again to the bottom of their trading range, which held its ground until December 13th. The setup was still in place for a traditional ‘Santa Claus Rally.’ Instead, equity markets started a slide that saw major market indexes drop -11% in the next seven trading days. Christmas Eve’s shortened session left equities at their lowest prices of the year. The Russell 3000 was 20% lower than its all-time highs of exactly three months earlier. The moderate correction melted into an oversold, severe correction in just days, and in December! Right before Christmas!

Then, in the midst of a hundred superlatives, there was talk of a Bear Market, which is absolutely incorrect. This is a correction, albeit a severe correction. Corrections are one dimensional. They are measured by price change. They are defined by the amount of price change, such as mild (5%), moderate (10%), or severe (15%). They can occur within the context of a Bull Market or a Bear Market. Bear Markets are not one dimensional and should not be measured by price alone. The traditional definition of a Bear Market includes both price (-20%), and time (more than 6 months), and should be reserved for major market indexes.

A correction can develop into a Bear Market over time, but they have always been accompanied by an economic recession. This is an ingredient that is totally missing in the current equity market equation. A recession is defined as two consecutive calendar quarters with negative National Gross Domestic Product (GDP). Our nation’s GDP has been expanding, albeit slowly, for a decade now, with the most recent quarter coming in at +3.4%. A lot would have to happen to turn that ship around. Currently, all we have is speculation on a series of unrelated topics such as tariffs, border security, the revolving door in the executive branch, and the Congressional quagmire.

Which brings us to the final question in this Commentary, how much longer will this correction last? All of the corrections this year have been somewhat symmetrical with respects to the time spent declining versus the time spent recovering. This is not surprising given the reality that computer-driven trading is running the markets unchecked and unregulated, another topic for another day. Programmed trade sequences can cut both ways, so the answer will be found when the true bottom of the correction is found. I am measuring from September 21st, so if the bottom was Christmas Eve, that projects to the end of March, with a substantial part of the recovery rally occurring in January.

© 2018 Edward D. Foy

Sources: Bloomberg, Marketwatch, StockCharts

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The Fifth Correction, Cont.

November 28, 2018

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

Equity markets spent the entire month of October searching for support. Finally, on October 30th, we saw a significant bottom develop. By that time it had become clear that this was not going to be just another quickie correction, with a one to two week decline and a one to two week recovery. After a -7% decline in the first week, followed by a less than +3% four-day bounce, the Russell 3000 declined for two additional weeks by almost -8%, bringing the total decline to -12% by the 30th. Finally, we saw a significant recovery of over 8% in just one week, only to be followed by another two-week decline of almost -7%. For short-term investors, the past two months has been exhausting. For long-term investors, it has been exasperating.

It has been exasperating for a couple of reasons. First, the timing of the correction. We are at the tail end of the year and suddenly, the modest but comfortable gains realized year to date are missing. Instead of building on those gains into what has historically been the most profitable three-month period, we are going to have to settle for a recovery rally. Second, there were no warning signs whatsoever that a major correction was on the doorstep. Third quarter corporate earnings were coming in better than expected. Third quarter GDP was strong. Mid-term elections held no surprises. Major markets trends were all positive, with fresh breakouts to new highs occurring in several equity market sectors. Fundamentally and technically, the seat belt sign had been turned off.

‘Clear air turbulence’ is the number one reason some people don’t fly, and the number one reason some people don’t invest. All investors understand that financial markets are subject to corrections. Market fluctuations create opportunities. But severe fluctuations can be disturbing, just like severe turbulence. We work to manage the turbulence by diversifying and by paying close attention. Most importantly, we maintain perspective and understand that the reason we invest is for the long-term journey, not in spite of the risk. Corrections come and go. The journey goes on and is its own reward.

International equity markets are having a much rougher time than U.S. equities. According to Morningstar, the average U.S. Tactical Allocation Fund is now down -4.59% year-to-date. Meanwhile, the average Europe Stock Fund is down -10.69%, the average Diversified Pacific/Asia Fund is down -11.37%, and the average Diversified Emerging Markets Fund is down -15.13%. So even in the midst of a major equity market correction, the U.S. equity markets are outperforming the rest of the world.

Bond markets are moving lower to the beat of an entirely different drummer, as interest rates continue to creep higher. Once again referring to Morningstar, year-to-date the average Corporate Bond Fund is down -3.34%, the average Long-Term Government Bond Fund is down -7.13%, and the average High Yield Bond Fund is down -0.79%. Only Short-term Bond Funds and Bank Loan Funds are in positive territory.

Which brings us back to the U.S. equity market and the ongoing correction. Large cap equity indexes are outperforming mid and small cap indexes. The equity market’s strongest performing sectors just prior to the correction were sold down the hardest, which is an indication of rebalancing as opposed to capitulation. The hardest hit sectors were energy and technology. The strongest sectors were utilities and consumer staples. From a technical perspective, the basing formation most resembles a double-bottom. From a time frame perspective, equity indexes are two months in and, should this double-bottom hold, that projects to a two-month recovery period. We certainly don’t want to miss that recovery rally, and we are not interested in making any tricky adjustments in this highly volatile period. The watchword is patience.

© 2018 Edward D. Foy

Sources: Bloomberg, Marketwatch, StockCharts

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The Fifth Correction

October 23, 2018

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

We are now firmly in the grasp of the fifth stock market correction of 2018. The Russell 3000 Index declined by -7.4% in just one week after that unsuspecting close of 1,729 on October 3rd. I say ‘firmly in the grasp’ because at this writing, after a +3.7% bounce off the initial low of 1601, the Russell 3000 Index is in the process of testing that low. My numbers reference the Russell 3000 Index because it includes 100 times more companies than the Dow Jones Industrial Average Index and 6 times more companies than the S&P 500 Index. In short, it gives us a much better view of the bigger picture.

The first correction of 2018 occurred in February. Like our current correction it hit bottom in just one week. The drop was significantly lower, measuring -11.7%, and the first bounce was much higher, up +9.9%. We experienced the second correction in March, with the Russell 3000 Index declining -8.6%, this time in just two weeks. The first bounce was +6.3% and took two weeks, only to immediately pull back into the third correction of the year. That decline of -4.4% also took two weeks but fully recovered in just one week. That recovery also broke a short-term downtrend and helped set up the five months of higher stock markets. Even then, there was a minor correction of -3.5% in June, once again with a two week decline and a one week recovery. That’s a lot of history and numbers in just two paragraphs, but the point is that corrections are part of investing, both in Bull and in Bear markets.

Corrections can be sparked by news, or by nothing at all. In the case of the fifth correction, it was mostly nothing at all. The chairman of the Federal Reserve was speaking at a conference the night before, with a positive reflection of the economy on his lips. He was the original suspect, but it was hard to find anything in his remarks that wasn’t already common knowledge. So it reverts back to the market’s equivalent of ‘clear air turbulence.’ Our coffee had just been served, with several sector breakouts to new highs, so most of it ended up in our laps. It was surprising and made a mess. Now we are working with the clean-up.

I am reminded how quickly things can change when I am in the pasture with my horses. If I get in tight and start working cockleburs from their manes it’s easy to lose sight of their collective hips and heads and hooves. These are the very areas that my grandchildren are taught early to always be aware of so they are safe. It’s much wiser to save the cockleburs for the barn and instead enjoy how the herd moves together, interacts, and maintains their order. Horses are far more predictable than stocks. I just wish they were profitable.

As unpredictable as the short-term can be, intermediate-term and long-term trends are much more manageable and profitable. The keys to success are having sensible rules in place and keeping a cool head. The first part can be pretty easy. The second part can be difficult. Sometimes it comes down to keeping your distance. If you get too close to the action, you can lose perspective. If you stand too far away, you can miss important signals that help you recognize shifts in direction and accompanying opportunities.

When you step back from this correction, one of the most important things to recognize is that we are rapidly approaching what has historically been the most profitable season for equities. November, December, and January have been the most productive contiguous months for equities since 1950. They are right around the corner. Then you have to acknowledge that the U.S. economy is the strongest in the world. Gross Domestic Product (GDP) numbers are 50% higher than they ran in the past ten years. Interest rates are still historically low, unemployment numbers are low, wages are rising. These are the ingredients for a strong stock market. The future remains very bright.

© Edward D. Foy

Sources: Bloomberg, Marketwatch, StockCharts

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The Top Five Questions

September 26, 2018

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

When I Googled ‘The Top Five Questions’ I got 1.81 billion results in 0.63 seconds. Seriously. I could go on about that relative absurdity for quite a while, but won’t. The short take is that the first five pages are about job interviews. Unemployment is historically low and the job market is tight. Makes sense. Then it starts to deviate into what to ask various doctors, Uber drivers, and God. In that order. We live in interesting times. The top five questions that I have been getting lately are far more direct.

Why are stock markets going up? Stock markets are going up because corporate earnings are going up because productivity is going up. The real kicker for the stock market was the decrease in corporate tax rates, from 35% to 21%. Since the tax rate cuts, which took effect this year, wages have increased, and unemployment has declined. It’s a win/win because two thirds of the U.S. economy is represented by consumer spending. This also put U.S. corporations in a very competitive global position. Before the reduction they had one of the highest corporate tax rates in the world.

Why have stock markets been rising so slowly? We are in one of the longest lasting Bull Markets in history. It follows one of the worst Bear Markets and economic recessions in history. The recovery has been taking so long because of steps taken by the Federal Reserve and the Federal Government after that Bear Market. The Federal Reserve decided to hold short term interest rates near zero, then entered into ‘Quantitative Easing’ measures designed to assist the banking sector. Meanwhile, the Federal Government ballooned in size with the aid of record Executive orders and bureaucratic expansion. This became a burden on the economy, because the federal government does not contribute to productivity. The result was a slow recovery and a slow stock market.

When is this Bull Market going to end? The quick answer is that we have never had a Bear Market without an accompanying economic recession. An economic recession is defined by two consecutive calendar quarters of negative GDP, gross domestic product. We haven’t even had one such quarter. If fact, the first two quarters of 2018 showed continuing expansion and growth. This type of growth doesn’t turn on a dime. In fact, leading economists project it to continue well into 2019, perhaps even into 2020. So we keep an eye on the horizon, but the reality is that trouble does appear to be quite a ways off.

How about those trade wars? The news media loves drama, specifically drama which aims at the White House, thus coining ‘trade wars.’ Almost all of the major trading nations in the world impose trade tariffs, including the U.S. The current administration is seeking to equalize tariffs. Why? Because some of our trade partners are ‘big boys’ now and don’t need that advantage any longer. Here are the average tariff rates for the U.S. and its ten largest trading partners: S. Korea, 13.9%; Brazil, 13.5%; India, 13.4%; China, 9.9%; Vietnam, 9.6%; Mexico, 7.0%; Malaysia, 5.8%; EU, 5.2%; Canada, 4.1%; Japan, 4.0%; U.S., 3.5%. The bullseye is on China, which has grown to be the world’s second largest economy. So far, everyone but Canada wants to negotiate.

What about the potential impact of the mid-term elections? Once again, this is a plaything of the news media, which will inject far more drama than substance into the process, and the results. Currently Congress is in virtual gridlock because the Democrats have no majority and the Republicans don’t know what to do with their majority. The result is a recurrence of Congressional inaction and a flood of Executive actions. The drama has also been extended to the Judicial Branch, which has become a surrogate decisive body in light of the relative ineffectiveness of the Legislative body. Financial markets happen to favor gridlock, because the rules remain the same, right, wrong, or indifferent. The impact of the mid-terms should be minimal.

© Edward D. Foy

Sources: Bloomberg, Marketwatch, StockCharts

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SELECTOR® Money Management

2018 Second Quarter Review

The Second Quarter Was Very Constructive For Domestic Equities

After an opening quarter that included the first 10% correction in almost two years, the 2nd quarter of 2018 saw domestic equities effectively stabilize. That being said, they sure took their own sweet time. April closed out with more questions than answers. During the month of May the short-term downtrend that started in February was finally broken. In June we saw another positive push, but it almost melted away in the final week. The Dow Jones Industrial Average (DJIA) rose +1.26% in the 2nd quarter, to finish the first half of 2018 still down -0.73%. The S&P 500 Index gained +3.43% in the 2nd quarter and is now up +2.62% YTD.

There Were Significant Variances In Sector Performance In The Second Quarter

Leadership was quickly restored in the Internet sector, with a sparkling +14.33% quarterly gain in the Dow Jones Internet Composite Index. This is also the leading index YTD, up +25.66%. An equally significant performance for the quarter was seen in the energy sector, with the S&P Composite 1500 Energy Sector Index gaining +14.32%. This sector is now up +7.43% YTD. Small Cap stocks also had a very good quarter, with the S&P 600 Small Cap Index gaining +8.77%, to stand at +9.39% YTD. On the flip side, the S&P Composite 1500 Financial Sector Index and the S&P Composite 1500 Industrials Sector Index fell -2.79% and -2.47%, respectively, in the 2nd quarter and stand at -3.38% and -4.00% YTD.

The 2nd Quarter Proved To Be Particularly Challenging For International Equities

Tariff talk has been on the table for a couple of years, and there were few surprises in the quarter. However, the new-found strength in the US Dollar took its toll, especially during the month of May, and especially in the Emerging Markets sector. The Russell Latin America Index, which had been a singular source of strength in the 1st quarter, fell -17.57% in the 2nd quarter. The Russell Emerging Markets Index fell -7.83% in the quarter and is now down -6.76% YTD. The Russell Europe Index declined by a more modest -1.19% in the quarter to stand at -2.65% YTD. The US Dollar broke a 15-month downtrend in May. That reality, coupled with rapidly approaching tariff deadlines provided a significant headwind for international equities. And both factors could reverse just as quickly.

Bond Markets Now Appear To Be Firmly Range-Bound

The US Aggregate Bond Index declined -0.16% in the 2nd quarter, and is down -1.62% for the first six months. These numbers are not awe-inspiring, but the short-term downtrend that started in January was broken in June. High yield bonds continue to have an advantage over high quality bonds. As one might expect, the rise in the US Dollar has pressured international bond markets significantly. The Bloomberg Barclays Global Aggregate Bond Index fell -2.79% in the 2nd quarter and is down -1.46% for the first half of the year. Interest rates continue to creep higher, and there has been a general dearth of bad news, which slowly gnaws on bond market returns.

Financial Market Returns Appear To Be More Related to Technical than Fundamental Factors

Equity markets were in desperate need of a correction, and they finally got a nice one in February. They have spent the next four months digesting it. The short-term downtrends are now broken, intermediate-term trading ranges are in place, and the long-term trends remain positive. This is not a bad scenario. The primary questions are when and where they will break out of the trading range. Interestingly, corporate earnings reports over the first half of the year have been excellent. This puts equity markets in the unfamiliar ground of lagging behind the fundamentals, rather than leading them. Once again, this is not a bad scenario. Bond markets are also in a trading range, but mired in slightly negative numbers. This is in spite of gradually rising interest rates, and good corporate news. This is not altogether a bad scenario for bonds and bond investors because there is always bad news around the corner, and their yields remain higher than real inflation. Patience can win this battle as well.

© Edward D. Foy

Sources: Bloomberg, Standard and Poor's, StockCharts

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Cindy L. Foy

Director of Operations

As the Director of Operations, Cindy is actively involved in practically every aspect of the business. She is the primary contact for Foy Financial Services, Inc.'s back office service provider and the information technology trouble-shooter. She is actively involved in executing portfolio allocations and reallocations, marketing for the company, and all day to day operations of the office.

As the proud daughter of Ed, Cindy takes her job of serving clients and the family business very seriously. After working part-time at Foy Financial while studying Finance at the University of Nebraska, she became a full-time member of the team in 2001.

In addition to her work at Foy Financial, Cindy loves her two sons and two dogs. She strives to not only practice healthy and fulfilling lifestyles, but to share that opportunity with others as well.

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Edward D. Foy

President & Chief Investment Officer

My job is to help you accurately assess your current financial picture, integrate that picture with your financial destination(s), and assist you in executing a plan that comfortably gets the job done. Whether you are just starting to invest, or well into your retirement, there is always room for good advice. My passion is to assist you in achieving your greatest successes, while taking the paths that are as clear and as smooth as possible.

After starting in the financial services industry as a stockbroker in 1980, I established my own firm in 1987. With experience in good and bad stock markets, high and low interest rates, business recessions and expansions, political solidarity and conflict, and international peace and turmoil, I can help you maintain perspective, interpret events, and manage expectations. We will form a partnership that is educational as well as entertaining for both of us.

Aside from the business, my world is centered around family. We are extremely fortunate to have all three of our daughters and all eleven of our grandchildren living in Lincoln. Our calendar is filled with their activities, and almost every holiday is celebrated with a family gathering, usually at our home. In short, life is good.

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Andrew J. Kramer

Director of Research & Chief Compliance Officer

After growing up in small Nebraska towns like Alliance, Big Springs and Blue Springs, I graduated from of the University of Nebraska-Lincoln and began my career at Foy Financial in 1996. In the twenty plus years I’ve been in the financial services industry, I’ve attained numerous licenses for both investments as well as insurance. Over the years I’ve played many roles at Foy Financial including Director of Research, Chief Compliance Officer and as a Financial Advisor. I love learning about the uniqueness of people and showing them the different ways to manage the problems they face. People have plenty in their lives to stress about. Talking with someone about their financial situation shouldn’t be one of them.

My wife Becky and I have been married since 1993 and have six children (2 girls and 4 boys). As the oldest have started to leave, our family has been quick to take in more pets. I enjoy the many adventures that come with parenting such as sports, music and scouting. I enjoy spending time outdoors, cycling, cooking, reading and exploring new places with my family.

“My goal is to help folks make the best possible choices with their finances and to make attaining their financial goals as stress-free as possible.”

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