What’s Going on in the Markets November 29, 2023

November 29, 2023 — Sam H. Fawaz

Who ya’ gonna believe? The headlines or the market?

The latest economic headlines read:

“Credit Card Defaults are on the rise”
“Household savings rates are at historic lows”
“Banking Credit Contracts to Levels Not Seen Since the Global Financial Crisis”
“Home Builder Confidence from the National Association of Homebuilders takes another sharp drop”
“Trucking Employment is Contracting at a rate not seen since the 2000 and 2008 Crises.”
“The Conference Board of Leading Economic Indicators Declined for the 19th consecutive month”
“Yield Curves are Steepening after being extensively inverted, a sign of recession”
“Overdue commercial property loans hit 10-year high at US banks”
“No End in Sight for the Ukraine-Russia War”
“Could The War in the Middle East be the start of World War 3?”
“World Panics as supply of Twinkies Shrinks” (OK I made that one up to see if you’re paying attention)

With headlines like these, you’d think the stock markets were crashing, and we’re already in a deep recession.

Instead, the markets are having one of their best Novembers in history (after an awful October), which has led to headlines like these:

“The stock market is following a rare pattern that could signal double-digit gains next year”
“Extreme investor bearishness suggests stock market gains of 16% are coming in the next 12 months”
“The S&P 500 could soar more than 20% in the next year after an ultra-rare buy signal just flashed”
“This stock market signal points to the S&P 500 surging 25% within the next year”
“The Dow just flashed a bullish ‘golden cross’ Two days after the bearish ‘death cross’ signal”

High inflation and interest rates, two prominent wars, and unprecedented dichotomies continue to mount throughout the market and the economy, which can only mean that Wall Street’s roller-coaster ride is far from over. Let’s take a closer look at some of the headlines driving the markets.

Leading Economic Indicators

The Conference Board’s Leading Economic Indicator (LEI) has warned of trouble all year. It has declined for 19 consecutive months, its third-longest streak on record. When viewed as a ratio with the Conference Board’s Coincident Economic Indicator (CEI), declines from peaks have typically led to recessions. When decreasing, this ratio provides evidence that coincident indicators are holding up, but leading indicators are deteriorating. The Leading-to-Coincident Ratio has steeply declined since its peak in December 2021. Never has this ratio fallen this far and at such a rapid rate without a corresponding recession.

Treasury Yields

Another warning sign still flashing red and has a near-perfect track record for predicting recessions is the yield spread between 10-year and 2-year Treasurys.

Typically, one would expect to receive a higher interest rate on longer-duration bonds, CDs, debt, etc. After all, the more time a debt is outstanding, the more risk the lender takes (e.g., default risk, interest rate risk, bankruptcy, death, etc.). 10-year Treasurys should normally pay a higher interest rate than 2-year Treasurys to compensate lenders (the public) for this added risk.

An inversion means shorter-duration Treasurys command a higher interest rate than longer-duration Treasurys. Historically, inversions are unusual and indicate the economy is vulnerable. After all, if you’re concerned about the economy, it means you’re concerned about corporations being able to pay back their debt. Hence, you’re more likely to buy shorter-term debt. That pushes shorter-term interest rates into inversion. Simply put, if you had concerns about your brother-in-law paying back a personal loan, you’re more likely to keep the term shorter rather than longer, right?

The most recent inversion of the 10-year treasury bill and the 2-year treasury bill interest rates began in July of 2022 and quickly became its deepest (widest) since the early 1980s. The initial inversion is an early warning sign of a potential oncoming recession, but when this yield spread moves back above 0.0 (or it un-inverts), historically, there are four months on average before the onset of a recession. So, this is another definite recession warning sign.

Institute for Supply Management (ISM) Economic Indicators

A few macroeconomic indicators bounced back from dire levels or improved earlier this year, spurring hopes of a soft landing. However, unfortunately, many of these improvements have recently reversed course.

The ISM manufacturing index, also known as the purchasing managers’ index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is a key indicator of the state of the U.S. economy. The PMI measures the change in production levels across the U.S. economy from month to month. The PMI report is released on the first business day of each month.

The 50 level in the PMI (both manufacturing and services) is the demarcation between economic expansion and contraction. Above 50, it’s expanding; below 50, it’s contracting.

Late last year, the ISM Manufacturing PMI index fell into contraction territory (<50.0) and has yet to move back into expansion. It has contracted for 12 consecutive months, showing some improvement mid-year before dropping once again in October.

The ISM Non-Manufacturing (or services) Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms’ purchasing and supply executives. The ISM Services PMI comes out in the first week of each month and provides a detailed view of the U.S. economy from a non-manufacturing standpoint.

The ISM Services Index has been resilient this year, dropping below 50.0 just once since the pandemic. After initially improving in early 2023, it has declined for the past two months and is now at a five-month low. Because more than 70% of the economy is services-based, any contraction would not benefit the whole economy.

Housing and Real Estate

Housing, another major economic sector, accounts for 15-18% of U.S. GDP and is also on somewhat of a roller coaster ride of its own. Despite its improvement earlier this year, home sales have retracted and are at their lowest levels since 2010.

Existing home sales, which comprise most of the housing market, decreased 4.1% in October 2023 from the level in September to a seasonally adjusted annual rate of 3.79 million, the lowest rate since August 2010, according to the National Association of Realtors. October sales fell 14.6% from a year earlier.

New home sales for October came in lower than expected at 679,000, lower than September’s surprise of 759,000 but slightly higher than August’s 675,000. Despite being below expectations, these numbers are pretty robust (not surprising, given that existing homeowners with low mortgage rates are not selling).

Today’s housing market is still one of the most unaffordable in U.S. history. Home prices have exceeded the extremes of the 2005 housing bubble peak. With today’s high mortgage rates, high home prices, and ever-increasing ownership costs, housing activity seems to be at a standstill overall. Continued declines in home sales would hint at a bursting housing bubble.

On November 8, the Financial Times reported that overdue commercial property loans hit a 10-year high at U.S. banks. The Federal Reserve’s hiking campaign to curb inflation has caused borrowing costs of all types to surge this year, including in commercial real estate. Combined with empty building space from the pandemic work-from-home trend, commercial real estate is in a tight spot. The Green Street Commercial Property Price Index is now down nearly 20% from its 2022 peak and back to a level not seen since the short COVID-induced recession in 2020.

Inflation

While commercial property prices have fallen, price pressures elsewhere have reaccelerated in recent months, prompting consumers to expect inflation to remain elevated in the months ahead. After all, how many items at the grocery or department store have you seen come down in price (besides perhaps eggs and gasoline?)

For October, while headline and Core Consumer Price Indexes (CPI) improved slightly (inflation down), the recent acceleration in consumer inflation expectations indicates that this improvement could be temporary.

In consumer sentiment surveys, the first half of this year saw consumers growing more optimistic about the economy as inflation slowed; however, expectations of future inflation have surged since then, and consumers are becoming discouraged again. Discouraged consumers turn into non-confident consumers who tend to put away their wallets and walk away from discretionary purchases.

Since September, consumer expectations of higher inflation in 12 months have increased significantly to 4.4%. Meanwhile, inflation expectations in five years reached 3.2% as of October’s interim report, their highest level in over a decade. Despite the recent easing in the CPI data, this inflationary expectation pressures the Federal Reserve to keep interest rates elevated.

Inflation expectations notwithstanding, consumers have enthusiastically supported the economy this year despite inflationary challenges. However, the upward trend in credit card delinquency rates indicates an increasingly stressed consumer. Figures from the Federal Reserve show that credit card delinquencies have risen to 2011 levels, and delinquent auto loans are at their highest since 2010. Though not at the extreme levels seen during the Great Financial Crisis (2007-2009), these delinquencies are not slowing and could quickly surge higher if stronger parts of the economy begin to falter.

Jobs

Employment continues to be the last bastion of strength in today’s economy and is important to watch. Jobs remain plentiful, and employees increasingly view employment as transactional (as opposed to long-term). While the unemployment rate remains at historic lows, it has trended upward recently, which could become worrisome.

The unemployment rate in October clocked in at 3.9%, quite low by historical standards but 0.5 percentage points higher than the low rate we saw earlier this year (3.4%).  Increases in the unemployment rate of at least 0.6 percentage points from a cyclical low have confirmed the onset of nearly every recession of the past 50 years, with only one false signal in 1959. Accordingly, the unemployment rate is now just 0.1 percentage points away from reaching this threshold, which would confirm the onset of a recession. The November monthly jobs report and the unemployment rate are scheduled to be released on Friday, December 8.

The Stock Markets: What? Me Worry?

Since the start of November, the S&P 500 Index has been up about 8.5%. The tech-heavy NASDAQ index is up about 10.8%.

Rocket-boosted by the Magnificent Seven tech stocks (Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla), the indexes would not be anywhere nearly as strong without them. While the combined seven stocks are up about 80% year-to-date, the other 493 stocks in the S&P 500 Index are flat. While historically, a handful of stocks “carry” the indexes, we usually see better performance from the rest, and we’re largely not seeing that. Lately, the rally is showing signs of slowly broadening out, which is a good sign going into year’s end.

If you look at the S&P 500 Index on an equal-weight basis (where each stock has an equal “vote,” as opposed to a weighted approach based on company size), the index would be up only 3.8% year-to-date. The Mid-cap 400 index is also up 3.8% year-to-date, and the Small Cap 600 is up 3.3%.

Since we’re in the 4th quarter of a pre-election year, the markets have two reasons to be seasonally positive. True to form, November has reclaimed most of the losses from August to October and looks poised to take out the July high in December. As long as the S&P 500 Index holds the 4400 level, things look good. Daily new high prices among stocks that outnumber new low prices are also encouraging and add to the rally’s strength.

My main concern is with the valuation of the Magnificent Seven Stocks. Compared with the Nifty Fifty Stocks in 1972 and the Tech bubble in 2000, these seven stocks are just as overvalued. Momentum trading combined with valuations this extreme can turn great companies into terrible investments, so buyers at these levels should beware. Should the drive to buy anything related to AI (Artificial Intelligence) cool off in 2024, these seven stocks will have a disproportionate effect on the indexes, driving down the markets quickly, especially since so many portfolio managers have piled into them as “safe havens.” I’m not saying to sell them now, but if you’re overexposed to them and have enjoyed the ride, it would be prudent to trim them at their current levels (this is not a recommendation to buy or sell.)

Recession Watch

A strong consumer, robust labor market, the housing wealth effect, and the lasting effects of a zero interest rate policy held in place too long have made 2023 recession callers look foolish (including me).

Underestimating the U.S. Consumer has always been a bad bet, especially when locked down for months, saving their stimulus checks and unspent wages and ultimately coming out of the gates splurging. While their savings are nearly depleted, I would not completely count them out just yet, and a recession in 2024 is definitely not a sure thing, although I still believe we will have one next year.

As discussed above, there are signs that the post-pandemic fiscal and monetary drugs are starting to wear off for the world’s economies, and a hangover might be on the horizon. Whether and when that hangover turns gross domestic product in a negative direction and, therefore, an economic recession, is anyone’s guess. I like what Bloomberg Points of Return writer John Authers wrote this week on that topic:

“…Having got this far, there’s now a pretty good chance the US can get through the next two years without a recession. But the odds still point more to a downturn. That explains the negativity in opinion polls and surveys of consumers, even if it completely fails to explain the enthusiasm among consumers when they go shopping. And then there’s the issue of stock market sentiment, which is utterly baffling.”

It would be understandable to read this post and think that things look grim and that it’s time to batten down the hatches and sell everything. It’s not. When it comes to discounting the future, the markets usually have it right (looking out 6-9 months), and we may just be experiencing some economic indigestion that will resolve itself, and the stock markets will challenge and exceed the all-time highs in 2024.

Election years are positive for a reason: the incumbents want to be re-elected, so you can’t underestimate the levers they can pull to keep the economy firing on all cylinders and postpone any recession until a later year. Never underestimate what determined politicians can do.

I would like to take this opportunity to wish your family and you a very happy holiday season.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: InvesTech Research

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Is a Recession Looming?

July 31, 2023 — Sam H. Fawaz

With inflation falling, the housing market stabilizing, and consumer spending showing surprising resiliency in the face of rising interest rates, both Wall Street and Main Street are passionately embracing the outlook for an economic soft landing.

Despite enthusiastic buying in the stock market of late, some major recession warning flags have not disappeared, consumer financial stress is increasing, and the Federal Reserve has just increased short-term interest rates by another 0.25% to 5.25%, and signaled that they may not be done raising interest rates.

The question on everyone’s mind: is a recession looming?

To answer that question, with help and data from InvesTech Research, let’s look at both sides: the economic “soft-landing” camp and the “hard-landing” camp, and see if we can’t draw any conclusions using a weight-of-evidence approach.

Evidence Supporting a Soft Landing

Inflation is Coming Down: The Consumer Price Index (CPI) is leading the optimistic charge in the media, with reports of decreasing inflation over the last twelve months. Headline CPI fell from 4.0% to 3.0% in June on a year-over-year basis. While much of this decline was driven by cyclical factors like energy costs, it still increases the odds of a soft landing.

Contributing to the decrease in overall prices are both the manufacturing and services sectors. The services sector saw inflationary pressures subside starting in early 2022. The Institute for Supply Management Services Prices Paid Index has declined by 30.4 points from its all-time high in December 2021. It has been down for the last seven out of eight months and remains in expansion territory (for now). This, too, supports a possible soft landing.

With decreasing inflation comes decreasing inflation psychology. Recently, consumers have reduced their expectations of inflation over the next year significantly. This measure fell in June to 3.3%, its largest decline since 2008, while the longer-term 5-year expectations remain more firmly anchored at 3.0%.

Actual inflation partially depends on what consumers expect it to be. If consumers expect inflation to be lower next year, businesses will plan to price their goods or services accordingly. It’s likely that the expected inflation rate will continue its downtrend and make a soft landing more likely.

Parts of the economy remain surprisingly resilient: In addition to easing inflation pressures, persistent strength in parts of the economy also supports a potential soft landing. Specifically, the service sector appears to remain resilient.

Services: The Institute for Supply Management Services Index (Non-Manufacturing) remains solidly in expansion territory with a reading of 53.9 last month (any reading above 50 is considered expansionary) and only one month of contraction in the last decade (outside of the pandemic). With services accounting for over 75% of U.S. gross domestic product (GDP), the current Index levels show continued growth. While there is no guarantee this will be maintained, its recent strength provides recession-free hope.

Labor: The relentlessly tight labor market has remained a stronghold of the economy for the last few years. June’s Non-Farm Payrolls report showed 209,000 new jobs created, another banner month for this indicator. The monthly average of new jobs added since January 2022 is almost twice as high as it was during the same period in 2018-2019 prior to the pandemic. In addition, the unemployment rate is currently at 3.6%, just fractionally above its 50-year low. With job growth holding up so well, it doesn’t point to a recession, despite being a heavily revised figure.

Housing: The last bit of soft-landing evidence is one of its strongest – New Home Sales. Sales of new construction have rebounded sharply. New homes currently account for a near-record 29% of all homes for sale, while the historical average is less than half that at just 13%. This recent rebound is driven by a resurgence in enthusiastic buyer psychology, reflected in a rise in traffic of prospective buyers and a reluctance by existing homeowners to sell their homes because of: 1) their current ultra-low mortgage interest rates, 2) higher home replacement costs and 3) potential capital gains taxes on highly appreciated primary residences. Whether this increase is sustainable will be clearer in the coming months.

Evidence Supporting a Hard Landing

A recession may nonetheless be in the cards: While I’ve laid out the evidence in support of a soft landing, many significant indicators just don’t add up, and therefore a recession may still be in the cards.

Leading Economic Index (LEI): The most glaring evidence against a soft landing is the Conference Board’s LEI, which has fallen for 15 consecutive months. Declines of this magnitude have always corresponded to a hard landing, and when the LEI falls below its 18-month moving average, a recession almost invariably follows. Additionally, the LEI’s 6-month rate of change (ROC) is deeply negative, further solidifying this warning flag (red flags are when the 6-month ROC breaks through the zero level prior to a recession). The LEI is historically a reliable indicator, and it is not sending an optimistic signal.

Yield Spreads: Another indicator that is screaming hard landing is the Federal Reserve’s Yield Spread model, which measures the risk of recession in the next 12 months. It’s based on the difference between long-term and short-term Treasury bond yields and recently hit a 42-year high of 71% before retreating slightly to 67% in June. This highly dependable indicator has never reached this level without a resulting recession, although lead times can vary significantly.

Consumer Spending: Lastly, consumer spending has supported the economy for much of the last few years, bolstered by trillions of dollars in stimulus payments and other benefits. Excess savings and lockdowns have helped fuel this strength, though it may be starting to slow.

Within retail sales, “Same-Store Sales” measures growth in revenue from existing (not new) store locations.  Johnson Redbook’s latest Same-Store Sales year-over-year figure went negative, indicating fewer purchases compared to a year ago. If this continues to deteriorate, it implies consumers are spending less overall than before, and a recession becomes more probable.

The Federal Reserve’s (a.k.a. The Fed) job is far from over: A potential soft landing combined with some weak economic indicators is a conundrum that puts the Fed in a tight spot. In addition, while headed in the right direction, inflation is still well above the Fed’s 2% target.

Sticky inflation, which tracks items that change in price very slowly, has not come down as rapidly as overall measures. Sticky Price CPI from the Atlanta Fed has started to decline on a 12-month ROC basis but is still quite elevated, with the current reading at 5.8%.

The shorter, 3-month annualized ROC is much lower but still not close enough to the Fed’s target. It’s very likely that Sticky CPI will continue to decline, but the elusive 2.0% will take much longer to reach than the Fed would like.

Core PCE: Yet another, perhaps more important, inflation indicator is the Core Personal Consumption Expenditures (PCE) Price Index, which measures PCE excluding food and energy. This is the Fed’s preferred measure of inflation and remains at more than twice of the 2.0% inflation target. On Friday, the latest PCE measure came in at 4.1% YoY for June, declining from 4.6% in May.

Making the situation even worse, Core PCE has been flat for the past year and is falling very slowly. Even if it does start to trend lower, it will take quite a long time to reach the target level, putting pressure on the Fed to keep interest rates higher for longer.

Wage Growth: When it comes to inflation, one of the stickiest components is wage growth. The labor market remains tight, there are still more job openings than available employees, and wages continue to rise. The Atlanta Fed’s Wage Growth Tracker is off its all-time high, but at 5.6%, it is still far above its historical average. While increasing wages are beneficial for consumers, it’s a problem for the Fed as failure to control wage growth could risk another inflation surge.

Consumer Distress as a Potential Systemic Risk: Consumers amassed over $2 trillion in excess savings after the pandemic, primarily due to government support and lockdowns. This backlog of cash has helped smooth over many underlying problems in the economy.  After lockdowns ended, consumers spent as if they had unlimited funds. Tack on a decades-high level of inflation, and they’ve now burned through over 80% of their excess savings. Based on current trends, these savings will be completely exhausted by the end of this year. Once savings are depleted, some consumers will likely resort to what is now very expensive revolving debt.

And some already have. Despite the amassed excess savings in some households, consumers still took on more debt than ever after the pandemic. As a result, the combination of auto loans, credit card debt, student loans, and other debt is now at a record high – 72% higher than during the Great Financial Crisis.

Regarding student loan debt, the Consumer Financial Protection Bureau reported that half of borrowers whose payments are scheduled to restart soon have other debts that are at least 10% more expensive now than before the pandemic. If these trends persist, consumers may struggle to bring their savings back to pre-pandemic levels.

Those who have opened new credit cards in recent years or regularly carry credit card debt are quickly coming under more severe financial stress. Monetary tightening has driven average credit card interest rates to over 22% in May – the highest rate since the Federal Reserve began tracking the data in late 1994. Extremely high credit card interest rates combined with record consumer debt outstanding could prove to be an ominous combination.

Consumer spending is the ultimate driver of the economy, making up almost 70% of GDP. If consumers can no longer afford to spend, this systemic risk can become a reality.

The Weight of Evidence

While the evidence is compelling in both the economic soft-landing and the hard-landing camps, more upcoming near-term economic data will help tip the scale solidly into one of the camps.

While it’s easy to say that a recession is inevitable, one could make that statement anytime during our lifetimes. Indeed, it’s not a matter of whether we’ll have a recession because we will. It’s all about the “when” of the recession.

In my opinion, the weight of current evidence supports a recession starting within six months. To be honest, I personally thought we were already in a recession, but the economic data has not supported that opinion, which means I have been wrong so far.

Regardless, a continued deterioration in consumer spending, increasing debt levels, growing layoffs, and higher short-term interest rates will have a detrimental impact on consumer confidence, which constitutes a negative feedback loop that will lead to even further reduced consumer spending and increasing layoffs.

The next few months will be very revealing…. if not exciting!

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: Investech Research

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What’s Going On With The Markets?

June 29, 2010 — Sam H. Fawaz

Well that was quick!

I’m referring of course to the short uptrend from the stock market correction that had seen a bottom on June 8. As of today, the S&P 500 index undercut the lows of the last correction and has put us back into another market correction. With all the overhang from worldwide events and mounting evidence of a slowing recovery, investor, consumer and institutional sentiment are at their lows.

In last week’s statement from the Federal Reserve, where it continued to hold interest rates at 0-0.25% for an extended period, the “Fed” acknowledged a softening recovery and lackluster employment growth. Hints of another fiscal stimulus or monetary easing emanated from Washington to help avoid a possible double-dip recession. Now you may have heard about the G-20 Summit meeting this past weekend in Toronto where the United States was the lone voice in encouraging a coordinated effort of more fiscal stimulus to heed off a global recession; instead, most European nations were insistent that austerity measures and tax increases were the way to go to bring their fiscal houses in order. While I’m totally in favor of balanced budgets and fiscal conservatism, simultaneously cutting spending and raising taxes are the surest way to plunge your country into recession or worse, depression (history has demonstrated this time and time again.) At a time when the recovery is so fragile, doing one of the two is risky; doing both is simply economic suicide.

The Conference Board reported a sharp drop in Consumer Confidence today which caught Wall Street completely off guard. However, today’s figures are in sharp contrast to last Friday when the University of Michigan reported its Consumer Sentiment gauge at the highest level in two years. Although the 9.8 point drop in the Conference Board numbers was higher than expected, keep in mind that Consumer Confidence fell over 10 points in February just before the last stock market rally. These numbers really don’t mean a whole lot to the markets, so I’d caution against reading too much into today’s report or market reaction.

As I’ve written before, the stock markets hate uncertainty. With the BP Gulf disaster getting worse, the European Union is still arguing who should pay for whom and how much, financial regulation passage still uncertain, new job creation largely absent, and slowing growth in China, we have the makings of a “bad news salad.” Even though yields on money markets and Treasuries are at their lows, it seems that there is no appetite for risk or conviction in the markets by both the bulls and the bears. With poor May retail sales, jobs, and housing numbers, the bulls haven’t had much to hang their hat on lately. But keep in mind that one month does not make a trend.

So we find ourselves once again at a critical level in the markets today. At a closing level of 1,041 in the S&P 500, the bulls must come in and rescue this uptrend or risk dropping another 6% from here to about 980. I must admit that I believe that our only short-term hope of averting this drop is a very favorable June jobs number on Friday (on the order of 100,000 new jobs created.) Tomorrow (Wednesday), ADP will release their preliminary estimate of the jobs number (of mostly private employment; it does not include government jobs) and it is widely expected to show 60,000 new jobs created. The ADP report is widely anticipated as an indicator of the main jobs report, but it has been known to be way off. However, many institutions and traders treat it as a preview of Friday’s number. Let’s hope that the Labor Department has a nice 4th of July weekend send-off for us.

So much bad news, negative sentiment and consecutive down days are built into the market that a bounce is overdue and may come tomorrow (Wednesday) if the ADP jobs report is favorable. For our portfolios, I will be closely watching the 1,041 level on the S&P 500 index for support. If that support line is definitively broken, I will look to reinstate the portfolio hedges that have served us well in the past. Even at these market levels, we are still considered to be in a correction, not another bear market. By technical definition, a bear market is a 20% decline from a market high, which was 1,220 in the S&P 500 index. That gives us running room to 976 to avoid descending into another bear market.

I personally believe that with an undoubtedly positive 2nd quarter earnings season coming up and a good jobs report, we can avert the drop to bear market levels. I am not in the camp that believes that a double-dip recession or depression is in our near-term future. Short-term, a negative jobs report and poor earnings guidance combined with severe austerity measures around Europe will likely mean bad news for stocks. My broken crystal ball predicts however that we will pull out of this malaise and that the recovery, albeit tepid, will carry the markets upward through the rest of the year. However, if the markets insist on going lower into bear market territory, I will look to liquidate a portion of equity portfolios and increase our hedges. Recall that earlier in the spring I mentioned that the summer months would be both volatile and bumpy…and here we are.

I am working on my 2nd half 2010 market and economic outlook and will send it out to everyone later this week. I wish I had better news for you right now. Nonetheless, I hope this update helps you understand a little more of what’s going on with the markets. Please feel free to forward this message to anyone who might benefit from reading it. If you have any questions or comments, please don’t hesitate to contact me. If you or someone in your family or circle of friends is considering hiring a financial planner, please visit our website or consider a complimentary financial roadmap via the link below. Your first consultation with us is complimentary and there is no pressure to make any decisions.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner (CFP®), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.
All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.
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