As Chinese and U.S. government officials talked optimistically about the trade talks, and absent any other significant bad economic news, the U.S. stock market marched ahead in April. The Fed continues to signal a patient attitude, with no current plans for rate moves. The market also sees this as a good sign, confident that the ‘Powell put’ is in place. Employment remains strong, inflation has stayed in check, and corporate profits are relatively healthy.
The U.S. stock market rallied in April on hopes of a big trade deal, although at the time of this writing those hopes have been dashed and the market has reversed course. Foreign stocks also did well in April, and even bonds drifted higher. By the numbers:
Oil prices continued to rise in April, gaining an additional 6.02%, and for the year are up nearly 40%. The U.S. dollar rose slightly in April, and is up almost 1.5% for the year. Gold declined slightly in April, and is flat for the year to date.
The ISM Manufacturing PMI in April was 52.8%, down 2.5 percentage points from the March reading of 55.3. The non-manufacturing, or services, index came in at 55.5%, which is 0.6 percentage points lower than the March reading of 56.1. Both numbers continue to show expansion, although the pace of growth has come down significantly. The Commerce Department released its second estimate of GDP growth for the 1st quarter of 2019. They revised their initial estimate of 3.2% growth down to 3.1% growth. Most economists believe that the rest of the year will see slower growth. .
The National Association of Realtors reports that existing-home sales in April fell by 0.4% from the rate in March, and are 4.4% lower than they were a year ago. The median home price rose 3.6% to $267,300 from a year ago. Median home prices have been rising for the past 86 months. The average 30-year mortgage rate in April was 4.14%. Distressed sales (foreclosures and short-sales) were 3% of total sales in April, down from 4% a year ago.
I usually write about general economic topics, and save specific investment conversations for client meetings. However, this month I will talk about some of the investments commonly held in client portfolios, as there are updates for many of them.
Many of you own preferred shares of Fannie Mae, either indirectly through the Fairholme Fund (FAIRX) or directly (FNMAS and a few others). Most of you purchased these shares several years ago at costs between $3.50 and $5.50 per share. After starting the year at $7.15 per share, in the last few months shares have gone to over $13 per share. In all client accounts, I have started to sell shares to capture gains. Fannie Mae and Freddie Mac were put into conservatorship during the housing crisis of 2008, and stock dividends were suspended. The agency in charge of the two companies, the FHFA, is headed by a 5-year political appointee. President Obama’s appointee closed out his 5-years on January 4th, and President Trump’s appointee has an agenda to end the conservatorship and return the companies back to their shareholders. In addition, shareholder lawsuits have also recently made traction in federal court, challenging the legality of the conservatorship. Much risk remains, hence the profit-taking. If shares move higher, I will continue to take profits. FAIRX is up over 25% year-to-date, besting the S&P 500.
Dish Network (DISH). Most of you own this stock, either indirectly through Putnam Capital Spectrum Fund (PVSYX) or directly. After a dismal 2018 where the stock lost over one third of its value, it has risen about 23% year-to-date, partially regaining what it lost. If I was more aggressive, I would take some gains from Fannie Mae and Treasury bonds and buy more Dish Network. I am not that aggressive. T-Mobile and Sprint are working on a merger, and trying to win government approval. I believe the results of this attempted merger, whether the government approves or denies it, are positive for Dish stock. If the merger is approved, T-Mobile wins a treasure trove of spectrum, and becomes a real threat to Verizon and AT&T who do not have adequate spectrum for a full 5G network. If the merger is not approved, T-Mobile must again try to buy spectrum somewhere. Other than Sprint, Dish is the largest holder of spectrum. PVSYX is up just over 12% ytd.
Almost all of you also own long duration U.S. Treasury bonds. We have held these for years as a buffer against stock market volatility. The most common funds are ZROZ (Pimco 25+ Year Zero Coupon U.S. Treasury Fund) and BLV (Vanguard Long-Term Bond Index Fund). As trade worries have caused volatility in the U.S. stock market, interest rates have dropped and these funds have handily outperformed the stock market. At the time of this writing on June 11th, ZROZ was up 20% ytd, BLV was up 10%, and the S&P 500 was up just under 15%.
Over the last 12 months, I added additional amounts of ZROZ to client portfolios. Most of you bought some in May 2018 at about $111 per share, then again in October at about $104 per share, and again in March of this year at about $109. At this writing the fund is valued at just over $125.33 per share. I am not looking to take gains yet – again, the primary purpose of this holding is to protect against stock market volatility, and President Trump continues to assure the markets that he will use tariffs as a tool, which is generally seen as bad news for the stock market. Bad news for stocks is good news for ZROZ. In addition, if the Fed lowers their reference rate again, that is also good for ZROZ.
Cash levels in client accounts are historically high. At this high price level, I don’t want to buy more ZROZ. And since I am concerned about further stock market volatility, I don’t want to purchase large amounts of stock indiscriminately. I will deploy this cash gradually, as prices look more attractive, and probably in international equities.
Most of you will notice that I have added a very small amount of Victory Global Natural Resources (RSNRX), which is down over 16% year-to-date, and also First Trust Natural Gas (FCG), which is down a few percent this year after dropping almost 35% last year. To be clear, you haven’t lost 16% and 35% in those – for the most part we bought after the large declines, although both have continued to drift down a bit. Both of these investments are essentially a bet on a global move away from burning coal. The Wall Street Journal had a nice piece today, they estimated that U.S. energy consumption rose 3.5% last year (faster than GDP). However, coal consumption only rose 1.4% and natural gas consumption rose 5.3%. Politics aside, natural gas is just cheaper than coal, so U.S. utilities are closing their coal plants and switching production to natural gas. In addition, the U.S. has started to export natural gas all around the world. The energy sector is historically volatile, so I am buying very small amounts of these, and gradually. But at the same time, prices are at multi-year lows, and demand for natural gas both domestically and globally is experiencing strong growth.
Standard disclaimer: none of this should be construed as advice to buy or sell any investment, stock, or security. Past performance does not assure anything, least of all future performance. Please be sure to consult with a financial professional before making any new investments.
www.standardandpoors.com – S&P 500 information
www.msci.com – MSCI EAFE information
www.barcap.com – Barclays Aggregate Bond information
www.bloomberg.com – U.S. Dollar & commodities performance
www.realtor.org – Housing market data
www.bea.gov – GDP numbers
www.bls.gov – CPI and unemployment numbers
www.commerce.gov – Consumer spending data
www.napm.org – PMI numbers
www.bigcharts.com – NYMEX crude prices, gold and other commodities
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