Marketline Monthly – Febuary 2019

Domestic Stocks

The rally in US stocks kept chugging along in February, with the US market indices gaining 3-4% across the board. That said, all the major averages remain below highs hit last year. Furthermore, last month we noted several upcoming events that could rock sentiment. One – trade talks – has seen diminished impact as further tariff increases were put off indefinitely in order to continue bargaining with China. Brexit, however, has moved to the front burner with a rejection of May’s recent proposal just today (March 12). As a result, negotiations will restart late this month, prolonging the agony and expense for all involved. Meanwhile earnings season is over, and we are beset by campaign talk domestically and troubles in European economies internationally. On the other hand, the Fed has backed down, after seeing evidence of slower home and auto sales. Just recently, the employment market dished up just 20,000 new jobs (keep in mind that these figures can be volatile and are nearly always adjusted later), cementing the Fed’s hands-off position. We’re in wait and see mode, with a new spate of earnings set to come out in early April. Will the widely expected earnings correction materialize? More to the point, will it be as expected, or worse, or better? Many companies have reset expectations in the downward direction; the test will be whether the market is in a forgiving mood, or not.

Bonds

Recently, shifts in the bond market have critically impacted stocks. Without the Fed’s dove-ish noises, and the recent EU decision to provide some easing, stocks would have continued to correct. But the parachute provided by lower interest rates is in play. While rates rose marginally along the curve from January to February, the numbers are more benign today, having dropped in every maturity since January. Lower rates make streams of dividends and earnings more valuable, helping to buffer stocks from the effects of bad news.

We called municipals attractive last month, and that’s still largely true, though this market has outperformed this year so it’s less cheap now. Worth a mention are several important court cases involving California’s pension issues on the docket this year. The first was decided by the California Supreme Court on March 4, and it amounted to a unanimous decision against firefighters asking to maintain ‘airtime’, a method used to increase years of service used toward retirement pay. At that time, the Court elected to sidestep a ruling on other measures used to increase pension payments, leaving those questions for later this year when it addresses other suits. In California as in some other states, pension payments are crowding budgets, causing basic services to be cut. These pending court cases could buy some time for hard pressed towns to generate extra funds, and if relief is enough, it could even boost credit quality, to the benefit of bond issuers. Rulings could also provide a useful template for other states such as Connecticut and Illinois, where budgets are in shambles.

With the long Treasury bond hugging 3%, and ever increasing proportions of the international bond market dipping into negative yield territory, we’re going to say the thirty year Treasury is attractive as well, even at 3%. You could be living with a long bond at 0.58% (Japan) or 0.71% (Germany). In that light, US rates look downright generous.

International Stocks

Overseas markets were not as strong as we enjoyed in the US. Canada rose 2.9% and the Nikkei pulled off a similar move. However everyone else fell behind, with European stocks up just 1.5%, the Hang Seng at 2.5% and then the decliners: Mexico dropped -2.8%, and Brazil slid -1.9%. We have to give Brazil some allowance for its outstanding performance in prior months. This index has risen from around 76,000 to over 95,500 since last August. Brazil is seen as benefiting from trade disruption between China and the US; it also has a more business friendly administration these days.

Update on 2019 retirement contribution limits: 401k, 403b and 457 account limits are now $19,000 with another $6000 allowed for ‘catch up’ if you are over 50; IRA is now $6000, with $1000 for catch up. Income phase outs for ROTH and deductible contributions rise too: the new baseline for singles is $122,000 running up to $137,000; and for married filing jointly, the range is $193,000 to $203,000. These are up a few thousand dollars each.

Marketline Monthly is produced by Cascade Investment Advisors, Inc. We specialize in value investing for individuals. We apply our approach across markets, looking for low-priced securities that offer above-average potential. We use imagination and hard work to bring performance and personal service to our clients. To learn more, contact Michelle Rand at 1.503.417.1950 or 1.888.443.9015; email to Michelle.Rand@cascadeinvestors.com. Our website is www.cascadeinvestors.com. A full list of stocks we invest in is available on request; mention of specific securities is not investment advice; such investments may or may not be profitable.