May Sucked. It May Yet Prove To Be Our Titanic Moment

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Includes: NCLIX, PGF, RELAX
by: Joseph L. Shaefer
Summary

This year, April showers brought nothing but May weeds.

Is this an anomaly in the great ongoing bull market or the beginning of a slow rollover into the next bear cycle?

Touts who tell you how much stocks are up “this year” conveniently forget that we are actually *down* for the most recent 5 months – and for the past year!

T.S. Eliot wrote that “April is the cruelest month.” Not this year.

I hope, dear readers, that you were not in index funds for the past 7 or 8 months.

At the end of an amazing January this year, the Dow was up a stellar 6.32%. And the heads of research for more than a dozen major Wall Street brokerage firms lined up to declare that the little dust up that ended on Christmas Eve was just an anomaly. You’ll notice that most of the comparisons presented as to how well the market is doing begin with January 2nd, the first trading day of this year.

Buy, buy, buy is the constant refrain from Wall Street – unless we are clearly plunging in a bear cycle. Then their tune is to just hold on because, in the long run, the market always rebounds to new highs.

The problem with that hoary bloviation is two-fold:

Not all of us can wait for the long term to unfold. We have obligations we must meet today. And tomorrow. As John Maynard Keynes noted most accurately, “"But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

Second, and even closer to most investors’ experience, once you have held and held, per the brokerage firm’s advice, when the bull starts to lower its horns and charge once again, they will tell you that there is something “much better” that you should sell that old holding in order to buy. If there’s anything brokerage firms love more than float, it is churn.

Let’s take a look at how the benchmarks have actually performed this past year.

First, you would have avoided all the sturm und drang if you had taken all your chips off the table and gone on a cruise at the end of January, rather than stick around for May. The Dow at the close on Friday, May 31, was up 6.38% for this year. That is all of 6/100 of a percent better than on January 31. Decimal dust.

Ditto for the Russell 2000 (small caps benchmark.) . Up 8.84% at the end of January, it has declined to being up just 8.6% today.

The S&P and Naz fared a little better but still gave up so much in May. The S&P was spoiling us all with a 17.51% return through April. That is now shaved to 9.77%. And the Naz declined from being up 22% at the beginning of May to 12.33%.

It is actually worse than it seems.

Remember, the amazing January only happened after the 4th quarter of 2018 saw a plunge of 11.8% on the Dow, 14% on the S&P, 17.5% on the Nasdaq and 20.5% on the Russell 2000.

Comparing where these benchmarks ended on October 1, the first business day of the 4th quarter 2018, and May 31:

The Dow closed then at 26,651. The Dow is now at 24,815.

The S&P 500 closed at 2,925. The S&P is now at 2,752

The Nasdaq closed at 8,037. The Naz is now 7,453

The Russell 2000 closed at 1,673. The Russell 2k is now at 1,465.

While “this year” may have been, until May, the favorite tout to cherry-pick, let’s now take a look back a full 1 year ago. On May 31, 2018:

The S&P 500 was at 2705

The Dow 30 was at 24,416

The Naz at 7,442, and

The Russell 2000 at 1634

The bottom line is that the needle has barely moved in a full year.

If you only bought Amazon (AMZN), Google (GOOG), et al you might have done fine. Only a couple months ago, I would have been able to add Apple (AAPL) and Facebook (FB) but they had their little kerfuffles as well. But of course, in an index fund you would also have owned General Electric (GE), the aforementioned Facebook, and so many others that are down significantly. As well.

What's Next?

Never make the mistake of thinking that politics, and geopolitics, don’t matter to the markets. It is true that in the long term, the market will have digested enough information to become the “weighing machine” that Benjamin Graham so astutely described. But in the short to intermediate term, that “voting machine” can create some very serious havoc.

President Trump's mercurial behavior, obsessing about Mueller, Comey, et al and waking up in the middle of the night mad at somebody new makes it difficult to make predictions.

That does not mean the other side, the essential-in-a-democracy opposition, has covered itself in glory, either. If we are experiencing one of those crises in governance that occur regularly in free and open societies, there is enough blame to go around and have a good bit left over.

I was personally in favor of the president's decision to take the fight to the tyrants running the People's Republic of China (PRC.) Under the current regime, jingoism and propaganda (fake news?!) has the populace believing they are beleaguered unfairly as it makes spurious claims about racism and hatred of the Chinese people. ("Us against the world" -- a favorite tactic of despots and tyrants since the beginning of time.)

Not true, of course. What does rankle in the US, Europe and most of Asia is the fact that the PRC government aids and abets property theft, intellectual property theft, blackmail, extortion and lying to get more money to build their military strength even beyond what it is today. And it spies upon its own people and imprisons them for dissent. Your basic dictatorship of the proletariat.

The decision to get China to play fair was a good one. But then President Trump became distracted with a new shiny bauble. Every time the opposition throws a softball, he swings madly. The latest, treating our two primary neighbors as if they were no different than the PRC, makes no sense at all.

Have we forgotten how lucky we are to have two oceans to our east and west and two friendly and like-minded nations to our north and south? The current leader of Mexico, Andrés Manuel López Obrador, contrary to expectation, has done more, not less, to control the flow of immigrants through his nation. It is in his interest to do so. Why use the economic sledgehammer – which will hurt US businesses as much or more, and possibly stop those US firms that want to leave China in favor of Mexico – just so the president can

President Trump doesn't like untrammeled illegal immigration. Neither do most Americans. But the rest of us don't suddenly wake up one morning, after spending 2 years sending US negotiators to complete the US-Mexico-Canada Agreement (USMCA) – the replacement for NAFTA -- and decide to punish our #1 and #2 trading partners who, between them, outpace our trade with China individually and, together, even before any talk of tariffs and trade, did so last year by nearly double.

That is not hyperbole. According to the US Census Bureau (yes, they keep track of this sort of thing, as well) thus far in 2019, here are the trade figures:

Source: census.gov

If the opposition or the party of the president were willing to step across the aisle and do what Congress is supposed to do -- *legislate* and provide counterpoints, versus the currently equally ridiculous modus operandi ('must impeach, must impeach, nothing else matters' on one side; 'must support the president, nothing else matters' on the other side) then I would be more sanguine. Until then, protecting your nest egg is what I will stress above all else!

What's next? I believe we will see a relief rally at some point in June. Nothing goes straight down forever. But I am already moving clients and my family accounts into safer income plays that have little to lose in case these outbursts lead to actual constriction of economic activity.

I have always had a strong low-Beta base of my approach to investing. It smooths out all those ups and downs since a good part of our portfolios are in asset classes which do not move to the same beat as the stock markets. Now I am increasing this percentage.

Why is it so significant that our elected representatives can not take meaningful action in infrastructure rebuilding, in mitigating trade and foreign policy issues with friends and allies, and in coming to a reasonable middle ground on health care legislation?

Because markets, which tend to do well in the third year of a president's term (2019,) often turn to sludge in the fourth year (2020) since it is mostly muck, mud and sludge that is being tossed about. Markets do not like uncertainty and in the heated rhetoric that will most certainly define 2020, little will be done.

How Am I Positioning For a Possible Sideways Market?

A sideways market, at best, that is.

If you view my Growth and Value Portfolio on Investor’s Edge® on SA’s Marketplace you will see I have a good portion in cash, a good chunk in income funds and the biggest portion in balanced funds, equity income funds and tactical allocation funds. (You can see it if you like; for a short time you may ask for a free 2-week trial.)

Only after I have taken care of current income and preservation of capital do I move on to a smaller amount in three other asset classes: leveraged and long/short funds, international equities and ETFs, and US equities and ETFs. Here is one example from each of these non-cash asset classes:

Foundation Income – the Invesco Financial Preferreds ETF (PGF)

Growth + Income – FundX Conservative Allocation Fund (RELAX)

Leveraged & Long/Short – Nuance Value Long/Short Fund (NCLIX)

International Equities / ETFs – Elbit Systems (ESLR), my favorite international defense industry company, and

U.S. Equities/ETFs – RLJ Lodging Convertible Preferred shares (RLJ-A)

Unless I see adult behavior and meaningful movement from both the legislative and executive branches to move forward on the serious issues confronting the United States, I will be steadily increasing positions which have a very low Beta (low correlation) to mainstream U.S. equities.

I am not holding my breath.

Good investing,

JS

Full disclosure: Some of what follows was discussed on May 31 with my subscribers.

Disclosure: I am/we are long RLJ.PA, NCLIX, PGF, RELAX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.