Market Blues Justified?

Investors seem to have a knack for creating things to worry about when it comes to the markets. But, are the latest "worries" reason to be concerned with regard to future

returns? We're not convinced they are valid reasons for concern. This week's inspiration for the musings is the TV show "Hill Street Blues." Here's some trivia about the show:

• The show aired for 7 seasons, from 1981 to 1987. The show was ground-breaking for several reasons. It was the first weekly television series to receive $1 mil from the network to film a single episode. It was also the first dramatic series to use hand-held camerawork and continuous story lines. The ensemble cast received equal screen time throughout the series.

• The show was nominated for 98 Emmy Awards and won 26, including 4 consecutive wins for "Outstanding Drama Series." In 1981, the series won 8 Emmys in its debut season, only to be surpassed by "The West Wing" in 2000.

• The well-known theme song for the show, written by Mike Post, became a hit song on its own, winning a Grammy. Post said he originally wrote a gritty song to match the visuals in the opening credits of the show. However, he changed at the last minute and wrote a serene track that would separate the viewers from what they were seeing.

• The show was not modeled after a specific city/police unit. The station shots in the show were of an actual Chicago police station. However, the uniforms worn in the show were based on the NY City Police Department. Neither city has a precinct known as "The Hill," but Pittsburgh does. Lastly, the city hall shown in the series is actually that of Philadelphia.

Here's what we've seen so far this week..

Reason For The Blues? Before we get to some of the ridiculous ancillary factors this week, the real question becomes, "Should investors be worried?" We think the answer

to that question is no. We have seen an extraordinary recovery in the markets since the April 7th low. When we see this type of recovery, the forward returns have historically turned out to be positive. Only four times in the last 45 years have we seen markets hit record lows and recover in a short period of time - 2008, 2011, 2016, and 2018 (see green vertical lines). In each instance, the S&P was higher 12 months later by an average of +23.6%. The ratio of highs to lows hit the mark again in March of this year, and climbed back up to a positive ratio of greater than 2.0 (see blue line). In other words, this recent recovery in equities is similar to past situations where the lows for the year were in and equities didn't look back. That doesn't mean that equities are incapable of having setbacks, but the low point should be set for the year.

Sticking with the historical data, the number of all-time-highs for equities can also give us a clue as to what the rest of the year might hold in store for investors. Only twice - 1973 and 2000 - did the market make at least 3 ATHs and not make at least two more ATHs in the same year. In 1973, inflation increased from 3.6% to 8.9% and growth was slowing. The S&P finished that year down -14.3%. In 2000, the Dot.com bubble burst as growth slowed and unemployment was on the rise. The S&P finished that year down -9%. This year, markets have only made 3 ATHs, but have recovered nearly all of the downside and are up just over 0.6%, year-to-date. Given this prior data, going back to 1929 in calendar years with at least 3 ATHs, there is a 95% probability that we will see additional all-time-highs at some point this year.

Let's Be Careful Out There. At the beginning of each episode of "Hill Street Blues," Sgt. Esterhaus would conclude his watch meeting by telling the officers, "Let's be careful out there." Investors need to adhere to the same advice when it comes to listening to

financial media. First, comments Thursday morning by Chicago Fed Governor Goolsbee probably left most listeners scratching their heads, as he stated, "This is a stagflationary direction, but it's not stagflation." Huh? It either is stagflation or it's not. Yet, the FOMC Minutes from last month's meeting were released this week indicating a 50:50 probability of a recession. To further confuse investors, the NY Fed, Atlanta Fed, and St. Louis Fed all show forecasts of +2% GDP for the 2nd quarter - not exactly a recessionary signal. It's no wonder investors are chasing news when leadership is so inconsistent.

Second, the 20-year Treasury auction that we were told was a definite sign of trouble looks a lot different one week removed. This week, the 2-year, 5-year, and 7-year Treasury auctions were held. The results were starkly different. The 2-year auction showed investors paying slightly above market for securities and "indirect" bidders (i.e., international investors) showed strong demand, accounting for 63% of the buyers. The 5-year auction showed similar results, with indirect bidders recording the highest demand in at least 18 years. The 7-year note showed equally-encouraging results with indirect bidders accounting for 71% of demand and investors also willing to pay up for the securities. So, the doom-and-gloom crowd that fretted over the 20-year auction appeared to have steered investors in the wrong direction as shorter-maturity Treasuries showed strong demand.

Fighting Tariffs With Tariffs?  The big news this week has, once again, centered around tariffs. A Federal court placed an injunction on tariffs Wednesday evening, stating that President Trump does not have the authority under economic emergency

legislation to impose sweeping global tariffs. However, according to Bloomberg, this is likely a "nothingburger" as the President has resources to continue employing tariffs. Tariffs known under Federal Codes 232, 122, and 301 give the President relief from the injunction. Section 232 allows for tariffs on goods deemed a "threat to national security." Section 122 allows for temporary tariffs (up to 150 days) to address "balance-of-payment deficits." Lastly, Section 301 allows for tariffs on foreign countries practicing unfair trade practices, such as intellectual property theft or subsidies. As fast as the injunction came, a US Court of Appeals ruled on Thursday that the injunction would be stayed. There are likely further court battles over this issue so buckle up.

Regardless of the injunctions or the lack thereof, trade between the U.S. and China has already begun to improve. Containers shipping from Shanghai to New York are up 33% since "Liberation Day" and containers from Shanghai to Los Angeles are up 23%. A sustained rally in equities would likely come with the announcement of any major trade deals. Until then, solitary news headlines or Fed speak could cause a temporary spike in volatility. In the meantime, investors should block out the noise and stick to their investment plan.

Let's be careful out there...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.