Trade Deal Flop?

The Stay Invested portfolio was DOWN today: $377 (-0.35%)

Overall GAIN/LOSS YTD: +$4,757 (+4.63%)

Our benchmark index, the S&P 500 is UP Year-To-Date +7.55%

http://money.cnn.com/data/markets/sandp/

(daily performance is updated after the close, early blog posts typically show the previous days performance)

"In 1989, a lone and still-anonymous Chinese student stood unarmed in front of a Chinese tank and gave the world an enduring image of the determination of China's young to change their nation. He didn't text message the tank or share a video on YouTube."

― Tom Brokaw

Live Portfolio

The portfolio graphics were updated today to, looks more like the overall site now. I've also added a couple of cells that track gain/loss information for the index funds we hold.

China Trade

The markets are very sensitive to both positive and negative communications on any possible trade deal with China. When the President announced that he would be meeting with Kim Jong Un at the end of February, my immediate thought was that Trump will not be meeting with Xi Jinping before the March 2nd trade deadline for the return to trade tariffs. I think its all optics and positioning that anyone who follows the story could predict. Xi Jinping asked for a meeting ASAP, Trump declined and set a summit with Kim Jong Un instead. From Trumps perspective he probably thinks he's putting Xi on his heels and making it clear that the talks will be on Trump's terms. Besides, what politician would do back-to-back negotiations with both North Korea and China? Creating a little room in between creates two momentous events instead of letting them blend into each other. I don't think there was any trade deal flop, in fact what we got was a strange kind of clarity. Trump's actions in this situation reflect his past actions. Since markets like clarity and consistency this should have given the market confidence. I suspect we'll see the U.S extend the deadline on tariffs and a meeting will occur early in March where we see some definitive progress but not everything we hope for.

The stock market decline today, over 300 points on the DOW at its lows, was unnecessary, but I was hoping to find some bargains. Unfortunately nothing on my buy list or in my bull pen came in enough. I'll look for more opportunities over Friday and Monday. A weekend of worrying should get us a pull back that we want.

The Wall of Worry

There's more to the market than China trade and 'Little Rocket Man'. The larger theme that has been moving markets has been the global growth story and the data coming in is showing that global growth is slowing. Central banks and the US Federal Reserve have done their job, they raised rates and sold off assets, shifting from a position of quantitative easing to one of quantitative tightening. Fortunately, J Powell got the message and held tight, choosing not to raise rates further. Historically the Federal Reserve has raised rates too high and too fast and triggered recessions when in hind sight they could have let the economy run a little hotter. With productivity low, and inflation in check, there's no need to raise rates; unless you're a fed chairman that wants to prepare for a significant decline. I think one day we'll see the fed increasing their balance sheet again just like they did in the financial crisis.

The European Commission reduced its growth forecast on Thursday. The Commission now sees growth in the Eurozone to slow to 1.3% in 2019, down from 1.9%. A good Brexit outcome could shift this number higher.

This morning, the market dropped when National Economic Council Larry Kudlow said that a trade deal with China still requires much more work. "The president has indicated that he's optimistic with respect to a potential trade deal," Kudlow said. "But we've got a pretty sizable distance to go here."

To be clear, slowing growth is not negative growth and in many ways slowing growth should benefit stocks as valuations become more attractive. Slowing growth does not indicate a recession, in fact there are no signs that we will enter a recession this year. The stock market is still fairly valued in my opinion, though I hear many talk about how expensive stocks are. Yes, there are over valued stocks; but the broad market is fairly valued and there are good buys within individual stocks. Below is a 10-year chart of the Shiller PE Ratio. The Cyclically Adjusted Price to Earnings Ratio, also known as CAPE or the Shiller PE Ratio, is a measurement conceived by Robert Shiller which adjusts past company earnings by inflation to present a snapshot of stock market affordability at a given point in time.

Looking at the Median P/E for the S&P 500 we see that its about 16X earnings; at 16 times the market is fairly valued compared to long term averages and has a lot of room to run up to get to the 23 times earnings which is the 50 year average.

- The median over 50 years is 21.4 times.

- The average over 50 years is 23.2 times.

Looking at the current year alone we see that the median and average is below the 10-year median and average. There are a number of metrics for judging if the market is expensive or under valued. Right now by this metric I think its fairly valued.

- The current year median is only 14.8

- The current year average is 15.6

Buying The Dip

I am anxious to put money to work, but it's very likely that this decline will continue, especially with the help of machine trading that sells on any negative news. I've set my buy below prices at very aggressive lows to increase our margin of safety. I'm particularly interested in finding some higher Beta stocks, higher growth stocks that can help us out perform the market. We'll just have to be patient to get some good deals on great companies.

Stay Invested,

Clay Baker

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved