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Notes and Thoughts Ahead of this Week's Federal Reserve Meeting

  1. Investors expect that the Federal Reserve will ease 25 basis points and that stocks will rally as a result. My feeling is that since this is the overwhelming consensus, it will not come true.  I believe the Fed will ease (because they all but promised that they would), but the market will not take off higher.  Maybe it will be because investors are disappointed by the future guidance or maybe because they just want to “sell the news”.  In any event, based on strong investor sentiment, I believe we are due for a correction.

  2. I’ve listened to several fixed income conference calls over the past two weeks. Bond managers are very frustrated by the high prices and poor credit terms they are getting on corporate bonds today.  We’ve been running for two months on the narrative that eventually the U.S. will follow Europe and Japan into negative rate territory.  Again, I’m not arguing with this as a possibility if the economy slumps enough, but I don’t think it will happen soon.  I’d fade the bond rally as well right now (meaning that I would stop adding duration for now).

  3. There is tremendous pressure these days on the idea of diversification, because the default assets - U.S. blue chip stocks and intermediate term treasuries - have done SO well this year. Diversification is one of those things that you need the most when you don’t think you need it.  Stick to your discipline.

  4. Gold is one of the few diversifying asset classes that has performed well this year. The thesis for gold is that Chairman Powell has been brought to heel by President Trump and can be counted on to use interest rate policy to ensure a strong economy on Election Day, inflation be damned. I believe the risk to that scenario is not inflation (which is usually built up over a generation’s worth of monetary mis-steps) but the bursting of an investment bubble and the resulting deflationary contraction.

  5. One of the biggest beneficiaries of very low interest rates are closed-end bond funds, because the leverage they used to boost yield just gets cheaper.

  6. One of the hottest areas of the stock market over the past three months has been the financial technology (fintech) sub-sector, led by stocks like Visa, Mastercard, and PayPal. Investors believe that they are stealing share for (or disrupting) the banking sector.  This is a hard area to target with an ETF, but the Fidelity Sector fund FBSOX may be one way to play it.<1>

  7. Late summer and fall is traditionally a weak time for real estate stocks, according to sector specialist Jay Kaeppel<2>.

  8. Recent currency weakness has been a blessing for European stocks. Many European stock markets are up 20% or more, but as dollar-based investors our gains are closer to 12-13% (unless we are using a hedged product such as the Wisdom Tree International Hedged Quality Dividend ETF (IHDG)).  Asia has not experienced currency weakness nor strong equity markets.

  9. The best two foreign markets over the past few months have been Turkey and Argentina, where sentiment at year end 2018 was terrible. India, where sentiment was fairly positive after it held up fairly well in the fourth quarter of 2018, has done almost nothing this year.

  10. Since the financial crisis, the direction of interest rates has been far more significant to stock prices than the rate of change in corporate earnings. There have been only two years this decade where future earnings revisions have risen during the course of the year – 2011 and 2018 – both down years for the broad stock market.

  11. Two of the worst broad sectors this month have been energy and health care. Energy is suffering from over-production and transport issues.  Failing to rally in the face of the Iran situation and the warm summer is not a good long term sign.  I would stay  away from energy for now.  Health care, on the other hand, is probably interesting at this point.  Valuations have improved dramatically on fears of a much more regulated health care system.  The life sciences sub-sector (think Thermo Fisher and Danaher, for example) is doing exceptionally well. -Mark Carlton, CFA <1> Telemet Orion is the source of all performance data in this post. <2> Real Estate’s Favorable Period is Winding Down, Jay on the Markets, 07/25/19 Disclosure Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site ( For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.

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