Street Signs:  A Year In Review

December 16, 2019

At Deupree James Wealth Management, we want to help you make smarter financial decisions. That’s why we  take  the  time to do our own research and don’t rely on the “wisdom” of Wall Street. Occasionally we share these insights  in a publication we call Street Signs. After a year of publishing Street Signs, more of our predictions are trending in the right direction than not.

Prediction #1: Buy the Dip

Date: December 21, 2018

Last December the stock market was in free-fall, and we had just formed our new boutique investment firm. On December 21, 2018 in our first edition of Street Signs we wrote, “at least one indicator says the stage may be set for a rally from the recent lows.” Investors brave enough to buy and hold from that day to December 9th saw the S&P 500 advance 29.87%.

Prediction #2: Economic weakness could be bad news for stocks short-term; good news longer-term.

Date: March 29, 2019

Our March 29, 2019 edition of Street Signs focused on a slow-down in rail traffic. We pointed out that a slow-down in economic activity could lead to short-term selling in stocks. But, using recent history as a guide, we noted that a slow-down may lead to government stimulus, which could ultimately be good for stocks.

We were one month early. The stock market remained strong in April of 2019, before dropping over 5% in May. This weakness drove the Federal Reserve to cut interest rates three times in the second half of 2019, calming markets and driving stocks to new highs.

Prediction #3: Bonds, Utilities, Real Estate, and Energy Stocks will outperform Industrial and Transport stocks.

Date: March 29, 2019

On March 29, 2019 we also suggested investors favor certain sectors. As of December 9th, we are on the right side of this trade. An equally weighted basket of ZROZ, XLU, VNQ, and XLE would have returned 7.37% while a basket of our less-preferred XLI and IYT would have returned 6.21%.

It is instructive to consider our lone underperformer: Energy stocks. Our risk-management process drove us to remove our overweight positions in Energy in May of 2019. We have since added it back. We also booked gains on our longer-dated treasury bonds in Q3.

Prediction #4: Implications of a Trade War with China:
Bullish for U.S. Dollar, Inflation, Bonds, Utilities, Real Estate, and possibly Mexico. Bearish for U.S. Retailers, Exporters, and Earnings.

Date: May 24, 2019

On May 24, 2019 we published our take on the winners and losers of a protracted trade war with China.

What we got right:

S&P 500 earnings are indeed declining for the first time since 2016, and, as mentioned elsewhere, Bonds, Utilities, Real Estate all fared well.

Moreover the U.S. Dollar drifted higher and the Dow Jones U.S. Retailers Index underperformed the S&P 500 by 5% from May 24, 2019 to December 9, 2019. We also saw a clear acceleration in core inflation over the last 6 months.

What we got wrong:

Incredibly, in the face of slowing global demand and a stronger U.S. Dollar, U.S. Exporters outperformed the S&P 500 by nearly 8% since May 24, 2019. And, despite agreeing to a new trade agreement with the U.S., Mexico’s stock market remains stuck in neutral.

Prediction #5: Earnings Recession, Yes. Economic Recession, No.

Date: July 19, 2019

In our July 19, 2019  edition of Street Signs we said, while “we do not see a recession in the U.S. as a likely near-term event, we would not be surprised to see an earnings recession develop over the next few quarters as higher wages and slowing economic activity put pressure on corporate profits.” According to Bloomberg, S&P 500 earnings are down 1.04% in Q3, the first such decline since 2016. Meanwhile, U.S. GDP remains positive according to the Bureau of Economic Analysis.

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