September 23, 2019
Fed Cuts Interest Rates Again as We Continue to Keep our Head Above Water
During the past week, major U.S indexes reached resistance at summer highs before pulling back and churning 1.3% lower (S&P 500). On Wednesday, Chairman Powell and the Federal Reserve lowered the target federal funds rate by 25 basis points. This is exactly what bond and equity Markets were pricing in, and despite some perceived hawkishness during Mr. Powell’s news conference, stocks and bonds ended up flat on the day.
Overall, we have seen some minor improvement in the yield curve inversion, which has been a major topic here and abroad over the past several weeks. Almost all past yield curve inversions have led to a recession within 24 months. The 10-year Treasury bond is now yielding 1.69% and the 2-year Treasury is yielding 1.65%. Obviously not much difference, but at least it is no longer inverted. Other parts of the yield curve still are, but the 2-10 is the area that is most closely watched.
The U.S. stock Market continues to significantly outperform everyone else. China and other emerging Markets are weak and well below highs reached early in 2018. Part of this is due to trade issues that remain unresolved and part is due to the strength in the U.S. dollar. A strong dollar negatively impacts commodity exporting countries, which make up much of the emerging Market complex. The one exception to this is gold, as it has benefited from deflation around the world and political uncertainty. Developed economies are not doing much better. Germany is technically now in a recession and Great Britain is sure to follow, absent a Brexit deal in the next six weeks. The developed world stock index “EFA” (that does not include the U.S. or Canada) is down 13% from its 2018 high. I have commented on the relative weakness around the world many times and will not belabor the point again, other than to say we cannot grow without trading partners. At some point the U.S. consumer will blink and our earnings will fall, without another source of demand. Of course, this reality is exactly what is being conveyed in economic data like the yield curve. It is why we watch the transportation index (IYT) so closely. It is also why we are always concerned with employment and real estate. Without jobs and a strong real estate Market, the consumer does not have the financial or psychological means to carry the U.S. economy on its back. Let’s not forget that most of the average American’s net worth is in their home.
So far, we have kept our head above water in all these important areas, despite lots of clouds on the horizon. Sometimes a strong wind can blow storm clouds in another direction. We will continue to watch for the wind and hope it is a good one rather than a bad one when it comes. At Cabana, we remain moderately bullish.
This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.
This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.
The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.
The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. Visit www.fa-mag.com for more information regarding the ranking.
Cabana claims compliance with the Global Investment Performance Standards (GIPS®). In addition to the firm’s third-party verification, six of Cabana’s core portfolios have been performance examined consistent with GIPS® standards. The Global Investment Performance Standards are a tradeMarc of the CFA Institute. The CFA Institute has not been involved in the preparation or review of this report/advertisement.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.