Spring Market Commentary

Brent Carlson |

“To treat your facts with imagination is one thing, to imagine your facts is another.” – John Burroughs

Let’s face it, the market volatility we’ve felt over the past few months has been just as uncomfortable as the never ending snow. Even though it is officially spring, we have experienced snow as well as some warm, lovely 60 degree days peppered in here and there which isn’t too unlike the market action we’ve seen. In fact according to Dorsey Wright, the Standard and Poor’s Index has moved up or down in excess of 1% 30 out of the last 65 days. Contrast this with 2017 where only 8 days saw such moves!

Despite the uncomfortably high volatility in the market, it is important to note that we have not seen any substantial leadership changes in the broad market at this point. So, while Bulls and Bears are fighting it out, and markets remain sloppy, let’s take a look under the hood and see what the technical underpinnings of the market look like. In our Dynamic Asset Level Investing tool, otherwise known as DALI, US Equities remain planted in the #1 position, just as they have since August 2016. At this juncture, the spread between the #1 ranked asset class, US Equities, and the #2 ranked asset class, International Equities, has narrowed to just 13 signals. This is a relationship we have been watching closely, and shows how International exposure is just as important as domestic. The other thing worth noting is how the past year has seen commodities moving up and fixed income moving down which is no surprise given recent increases in interest rates. 

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When we look at the 11 broad sectors under the domestic equity asset class, we continue to see more of the same. Technology and Financial continue to be the big leaders as they have been for quite some time.

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Interest Rates

Recently, the Ten Year Treasury (TNX) hit 3% for the first time since January 2014. Yields have been climbing most of the year, and the positive spin would be that this is a vote of market confidence in the economy and perhaps eases concerns about geopolitics and trade (see our tariffs and trade letter at carlsonasset.com). Interest rates have a massive effect on the overall economy. Auto loans, home mortgages, and other loans are all tied to the benchmark 10-year yield. Some investors fear that higher interest rates could start to eat into corporate profits and also signal that more inflation is coming. I attached a copy of the Ten Year Treasury (TNX) chart on the next page. I have highlighted the four consecutive instances where the Ten Year Treasury hut 2.925%. On Wednesday, April 25th, the TNX hit 3%% and broke through its resistance at 2.975%. This technical breakthrough is what is known as a “quadruple top,” and is considered to be a very bullish pattern.

Despite the idea that rising rates are bad for stocks, they have risen in the face of rising interest rates in the past. You may recall the days of double digit interest rates and “stagflation,” and by most measures of history, rates are still quite low. When stocks are under pressure and investors are looking to generate income in their portfolios, we generally recommend buying more stable high dividend paying stocks. Utilities, especially water utilities, have been a core holding in most of our portfolios for 20+ years, and they have yet to let us down. It is no secret that water is very important to our country and communities. I have written extensively on this subject over the years, and one of the things that makes water such an attractive investment is that there are few publicly traded companies. Water in the US is primarily a municipal duty with only a handful of “pure play” publicly traded water stocks. Over the years we have watched many of our water stocks be bought out by larger companies at a nice premium. The economies of scale seem to be a major factor in the industry consolidation. The most recent example of this is, the unsolicited $1.9 billion offer by California Water Services (CWT) to buy SJW Group.

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Oil

At the end of January 2018, we witnessed the Commodities asset class overtake Fixed Income for the third place position in the DALI rankings (as you can see on page 1). One of the reasons for the bump in the tally ranking for Commodities is the general improvement within the Energy sector. The fuel behind energies gains has been the rise in the price of oil. If we look to the Crude Oil Continuous CL/ chart above for reference, we can see the chart has continued to improve throughout 2018 and currently trades at multi-year highs having broken a spread triple top at $67. Oil has broken through many technical barriers and is in an obvious uptrend in price. There certainly isn’t a shortage of supply of oil worldwide, and one of my theories for the increase in the price of oil is the pending initial public offering (IPO) of Saudi Aramco, the Saudi Arabian National Petroleum and Natural Gas Company and world’s largest oil company. It is in their best interest to go public when oil is at a higher price. President Trump recently made a reference to this when he tweeted that OPEC is artificially keeping oil supply down by keeping oil tankers at sea. Regardless, the summer driving season is almost upon us and the fundamentals are there for the continued near term increase in the price of crude.

North Korea

On Thursday, April 26th the leaders of North and South Korea committed themselves to the complete denuclearization of the Korean Peninsula and pledged to bring a formal end to the Korean War 65 years after hostilities ceased. The day long summit saw South Korean President Moon Jae-In and his North Korean counterpart, Kim Jong Un meet and talk alone for more than 30 minutes. They then signed the Panmunjom Declaration for Peace, Prosperity and Unification on the Korean Peninsula, which commits the two countries to denuclearization and talks to bring a formal end to conflict. The United States and North Korea have been engaged in a psychological war and President Trump understands the mental game like no president before him, and Kim Jong Un appears to have a similar toolset. Never have we had such a perfect setup for peace. There is a win here for both leaders, and a win of historic proportions. A peaceful future on the Korean peninsula would be good for international markets as well as domestic companies looking for a new market to export too.

Closing

I entered this business 36 years ago in 1982 and much has changed since then. Of all the changes that have taken place, I think the most important change has been the creation of a fiduciary relationship between the advisor (myself) and the client. Fiduciary is a legal term that bonds me to acting in the best interest of the client and “puts me on the same side of the table” as you. This aligns our interests and helps remove any conflicts of interest. Every day brings new opportunities and challenges and I believe we have the right tools here at Carlson Asset Management to help you keep your money on track. As always, I invite your comments and questions, and invite you to call or make an appointment for a portfolio or financial planning review. Also, if you are receiving this letter via snail mail and would prefer to receive this correspondence from us via email, please give us a call or email your request.

Sincerely,

Bruce Carlson, CFP®

President

Carlson Asset Management

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.