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From the Desk of Bob Centrella, CFA:                                                  March 7, 2018
 
 "Tariffs, Rising Rates and Falling Stocks - Oh My" 
 
My Business Depends on Referrals -  It's a new and volatile year and a great time to review your portfolio - If You Know Someone in Need of Financial/Investment Services Please Have Them Contact Me at 908-344-9790 
  
 
Dear Friends:
 
As we approach a great part of the year - March Madness, we've been through a month of stock market madness.  Several hundred to thousand point drops in the Dow have gotten the headlines.  But perhaps this madness is simply the move back to some normalcy in stocks.  You know, where stocks go up AND down!
 
February ended a streak of 15 months where the stock markets delivered positive total return for each month, one of if not the longest streak ever.  In February, the S&P 500 declined on a price basis by 3.9% while the Down Jones declined 4.28%.  The decline also marked the worst month since January of 2016.  But through 2 months, the S&P was still up 1.5% while the Dow advanced 1.3%.  During the month we also reached an official correction of a decline of 10% from the high.  Volatility is back with a vengeance and is probably here to stay.  
 
There is a lot for investors to chew.  In my last letter I listed of bunch of items.  Let's review some of the current chief walls of worry.
 
1.  The 10-yr US Treasury rate closed in on 3% last week before some buying settled the yield back to 2.87% while inflation and rising wages are of concern.  
2.  Volatility jumped back into the markets, much of it due to a technical trade that needed to unwind.  But still, it is expected that the days of low volatility are likely behind us.
3.  The new Fed Chairman, Jerome Powell talked about the economy being a bit stronger than anticipated, worrying investors that perhaps more rate increases are in store in 2018 than the projected 3.  
4.  Late last week President Trump announced price tariffs on imports of Steel and Aluminum.  This came as a surprise and repercussions of a possible trade war sent stocks falling here and around the globe. 
 
First, I'd like to address the rates issue.  Originally I was going to title this piece as "What's all the fuss over a 3% US Treasury Yield?.  Prior to 2008, we never know what a 3% US Treasury was, as most of us had never experienced it in our lifetimes.  But even so, that means that stocks were able to return about 9% annually through rates as high as 15-18% in the early 80's. I mean really, is a 3% annual return over 10 years something that gets you excited as an investor?  Not me.  Many younger investors who jumped in the market since 2009, the beginning of this bull run, have only known low rates and an accommodating Federal Reserve. So what we are undergoing is an adjustment period for investors to "re-acquaint" themselves with rising rates and a yield potentially above 3%.   As a reminder, the 10-yr yielded 3% in 2013 and the market returned 29%!  So skipping through all the other BS I can write about in regards to rising rates and inflation, I'll keep it simple --  Rates tend to rise when the economy is doing well.  If the economy is doing well, companies are increasing earnings.  If companies are increasing earnings, stocks generally rise.  So, I don't get too excited over rising rates.  If rates rise rapidly and we see a 4% 10-yr treasury in a short period of time, then I might want to revisit what is going on.  But in the meantime, the angst over a 3% yield is a buying opportunity in my mind.  Ultimately it always comes down to the Fed raising rates too much and the economy eventually slipping into recession.  But I don't see us there for quite some time from now.   
 
Regarding the price tariffs, I'm a bit stumped as to why they were announced.  Going back to my high school history class, a tariff is basically a tax, and one that ultimately would make its way back to the consumer.  This would then offset some of the recent tax cut that companies and US citizens were set to enjoy this year. The benefit to the small number of steel and aluminum companies would seem to be far outweighed by the price increases that consumers of Steel/Aluminum will incur.  Monday the market rallied when House Speaker Ryan publicly opposed the tariffs.  Today his economic advisor Gary Cohn resigned which has spooked the markets a bit.  Without getting too bogged down in details, I will predict that the end result will be watered down and not as onerous as last week suggested.  Remember, Trump is a negotiator.  This may be his opening salvo. But still, Trump remains a wildcard and further actions on his part could be tough on stocks.  
 
Finally as for volatility, it is likely back for good.  The last 2 years were somewhat unprecedented with regards to low volatility and with the Fed and other Central banks becoming less accommodative with monetary policies, stock markets may behave in a more normal way -- more volatility.  Volatility is not necessarily bad as it presents trading opportunities.  But that brings big price swings like we experienced this past month.  So far, investors have eventually responded to drops as a buying opportunity.  Could that wear off?  Of course.  But there still seems to be a lot of positives to offset the negatives for the foreseeable future.  
 
In sum, the recent pullback is normal and healthy for stocks.  I still believe that by year-end we will enjoy a decent year for equity returns.  But it won't be a straight line.  Pick your points of entry, and if you are in there already hang tight and use cash to make opportune purchases.  

Spring is around the corner, have a great rest of the winter.   

Bob    



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From the Desk of Bob Centrella, CFA:                                                  February 5, 2018
 
 "Is The Correction is Here?" 
 
My Business Depends on Referrals -  It's a new and volatile year and a great time to review your portfolio - If You Know Someone in Need of Financial/Investment Services Please Have Them Contact Me at 908-344-9790 
  
 
Dear Friends:
 
Earlier this morning I wrote the letter below but never got around to sending it out.  As it turns out the market dropped over 4% today and at one point was down almost 7% at the low.  Selling today was largely technically driven as the S&P 500 breached its 50-day moving average and computerized selling intensified.  As of today's close we are now down 2% for the year and off over 7% from the high and in the midst of a potential correction that everyone was waiting for.  On a technical basis the 200-day moving average is about 4% lower from here and offers support if we go down further.  But no matter what caused it, today was not pretty.  But fundamentally, the news is good out there.  Perhaps the news is too good as companies are reporting strong earnings, the economy is solid and the concern is that things are too good and the Fed will be more aggressive in raising rates.  But the market can go up with rising rates once expectations are adjusted.  
 
Let's see again what happens tomorrow.  Overseas markets are likely to decline big which would lead to a bias to open down tomorrow again.  The hard part as an investor is that the selling is so rapid with 2 days bringing a decline of 7%.  On the positive side, there are now a lot of stocks that are down over 10% from their highs and looking attractive again.  I think buyers will reappear this week as we move on.  
 
So below is what I wrote this morning.  Little changed in my thoughts on what I wrote other than the market continued to selloff as the day progressed.  If anything, the rapid selling may get some buyers back in the market.  
 
Back in December I sent out a note which mentioned the following:  
 
I’ve been seeing and hearing a lot of questions mostly sounding like:   "Are we due for a correction?  How much longer can this market go up?  -Will it ever go down again? The market is overvalued. Is this a bubble?"

This was early December and heading into last week the stock market had risen another 7%.  

Well, last week was the worst week for stocks in 2 years as the market dropped sharply on Friday and ended the week down 3.85%.  So I wanted to reach out this morning after last week's market decline and this morning's early decline and give you some thoughts and put things in perspective.    In my recent annual letter and in notes over the past year I've been mentioning that we have not had a 5%+ decline in the market since 2016. The S&P has risen for 15 straight months.   This is NOT normal.  Historically we had averaged about three 5% declines per year.  Since the election in Nov 2016 stocks had risen 36% heading into last week without a decline during that time of more than even a couple percent.  Let's put that into dollars and cents.  A $100K stock investment is now worth $136K in a little over a year.  Not a bad return.  Under normal circumstances with an annual market return of about 9% historically, that would take about 4 years!  Earnings have also risen sharply, but more like 15%+, so the market is ahead of earnings growth based largely on a strong economy, a strong world economy, tax cuts, accommodating central banks, low rates and strong future expected earnings growth.  These pillars are still in place although what seemed to spook investors in the last 2 weeks was that bond yields rose unexpectedly with the 10-year UST yield jumping from around 2.5% to 2.85% while yields in places like Germany and the UK also rose.  The US also saw some wage increases on Friday with the release of the jobs report that also raised some concerns that the low unemployment rate is causing rising wages which could cause higher inflation.  This rise in yields must be digested and factored into the market. As such, we might be getting the long-awaited correction that everybody has been looking for.
 
Having said all that, there are NO signs of a bear market such as a financial crisis, rapidly rising inflation, or a recession.  Let's take a deep breath, this is what a market pullback feels like.  It's probably going to get a little worse before it gets better.  We've all forgotten that markets do decline.  We are 9 years into a bull run.  While they can be scary, market pullbacks prevent stocks from overheating and give investors who were stuck on the sideline a chance to get in.  Once the sellers are done in the market, buyers will come back in.  Maybe then we get some normalcy to the market where stocks don't rise all the time.   
 
I believe the pullback should be short in duration and shallow.  Something around 5%-10% is painful but will be good for the market.  Investors may buy the dip which has been the tendency this past year. 
 
There are many more things at play including:
 
-Congress must agree by Feb 8th to not shutdown the government over the debt ceiling
-The Fed and other central banks are beginning to ease up on monetary accommodation
-The Fed has already signaled it will begin shrinking its balance sheet which means it won't be buying bonds
-The Fed is expected to raise rates 3 times this year after 3 times last year
-The dollar has been in retreat against international currencies
-Oil prices are back above $60 per barrel
-New tax reform and marginal rates must work their way through the economy
-The White House can't shake the FBI investigation
 
But let's say that although I am concerned (as I always am as your investment manager) I remain confident that this too will pass and we will finish the year higher as there is still too much good news out there barring an unforeseen geopolitical event.  The biggest risk is the 10-yr UST rising to above 3% which could cause some short-term re-allocation of assets and keep stocks at bay.  
 
Again putting things in perspective, the S&P 500 is still up 2.5% this year even after its decline (this was as of 11am this morning, it is now down for the year).  In any other environment that would be a great start to the year.  It's just how we got here that is causing the angst.  Teh market went too far too fast.    
 
Personally I don't like to try to time the market unless in extreme circumstances.  But I do believe in making some changes on the margin.  This might be a good time to take a few profits and have some cash ready to reinvest if we do get a more prolonged pullback.  
 
On a lighter note, congrats to the Eagles and their fans on a hard fought Super Bowl win.  And more importantly,  as the Super Bowl predictor goes this is good for the stock market.  The Predictor says that if an NFC team or original NFC team wins, then the market will rise in the coming year.  It's been right about 67% of the time, mostly wrong when predicting a down market when the market went up. So, the Eagles win should bring market gains! 
 
Have a great week.   

Bob 





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