Quarterly Review-July 2019

Always a good time to be prepared

For the first half of the year, both the stock and bond markets have provided good results. During the 4th quarter of 2018, we were surprised by the weakness in equity markets while the economy continued to show strong signs of growth.  Our advice to you was to stay invested through the last downturn.  During the past two months, we have had concerns because the stock market is hitting new all-time highs in the face of weakening economic data. The rising stock market this year has helped all our accounts grow.  After the good run of gains, we want to make sure that all our clients are properly allocated, and our opinion is that now is the time to revisit your Investment Objective and balance of stocks and bonds in your entire portfolio.  As life changes happen, we need to make sure your financial plan and portfolio maintain alignment with your goals.

The United States economy will have a downturn and the stock market a correction, but we do not believe this is immediately imminent.  Over the longer run, we firmly believe that having a portion of your assets invested in the stock market is the best avenue for long term wealth creation…but it comes with short term volatility.

As your advisor, we monitor your accounts and make adjustments to keep your portfolio within the range of your current Investment Objective.  In addition to reviewing your objective, it’s important to:

  • Look at all your accounts combined, not just your Lucas Capital assets, to determine your asset allocation (don’t forget 401(k)s, IRAs, individually owned stocks and incentive stock plans).  We can help you organize and consolidate this information.
  • Consider if your life plans or financial circumstances have changed since the last time we had a conversation about your Investment Objective.  We would be happy to have a call to discuss that with you.

We don’t know the exact timing of the next recession or market correction, but now is the time to ensure that we have the right risk profile so that we are prepared to weather any changes the economy or market may deliver.

The data is not giving us clear signals

The following chart shows that stock market downturns are correlated with economic recessions. Light gray bars represent periods of US recession since 1947 while stock market declines are shown by the irregular gray areas. It’s easy to see the pattern that recessions drive stock prices down.

Our economy has been doing well for 10 years.  We started the current expansion in the second quarter 2009, 121 months and still growing, making it the longest uninterrupted period of growth since 19001.  Though it’s the longest in duration, it’s relatively weak in terms of strength.  During the expansions of the 80s and 90s, the economy grew 38% and 43% relatively.  In our current 10-year expansion the economy has grown only 25%, averaging 2.3% annually2.  There are signs that the economy is continuing to grow while others point to the fact that we are probably late in the cycle.

On the positive side:

  • Job growth continues to be strong averaging 172,000 jobs created per month this year. Unemployment stands at 3.7%, near all-time lows3
  • University of Michigan Consumer Sentiment, at 98.2, is 13% above the average since 19524
  • June Retail Sales exceeded expectations at 0.4%, feeding broader economic growth7
  • Federal Reserve is predicting GDP growth of 2.1% for 2019 and 2.0% for 2020

On the worrisome side:

  • Declining home sales indicate that we are late in the economic cycle5
  • With short term interest rates above long term interest rates (an inverted yield curve) bond investors are indicating they are worried about recession6
  • Employment growth is slowing.  The 172,000 monthly job creation average in 2019 is far below the average of 223,000 in 20183
  • The extended trade dispute with China and potential tariffs on imports worry the stock market
  • 80% of S&P 500 companies cut profit forecasts for 2nd quarter earnings8
  • The FED is indicating that they will cut interest rates.  What are they seeing on the horizon?

Balancing all the data, we do not believe that a recession or stock market decline is in the immediate future.  But there are enough worrisome signals to cause us to be cautious.  It’s better to prepare now then wait for the storm to be upon us.

Setting the right investment objective  for your stage of life and financial plan

As your advisor, we will keep your portfolio balanced to the Investment Objective that we have agreed and discussed with you.  We trim and add to positions as needed to maintain diversity of holdings and keep within the parameters of the Investment Objective.

The Lucas Investment Objectives are:

  • Aggressive Growth
  • Growth
  • Family balanced
  • Balanced Income
  • Sector Specific

You can find details on each of the objectives on our website.

We know that your Investment Objective will likely change over your life.  For example, in your 20s, an Aggressive Growth portfolio best suits the situation because the need for the money is long term. Later in your working careers, it’s a time to usually want more balance between growth and capital preservation, so our Family Balance Portfolio fits your situation.

Age is only one factor in setting the right investment objective. Other considerations are your thoughts around the purpose of your money: Is it for a comfortable retirement, helping your children, or leaving a legacy gift to a charity? The amount of wealth you have accumulated compared to annual spending patterns is an important consideration. Your comfort with gains and losses in your account on a monthly basis also impacts the decision. If you will lose sleep over short-term losses during a market correction, we suggest a more conservative portfolio. We are well versed in taking all these factors into consideration and walking you through the process where we can agree on your Investment Objectives. When your life situation warrants a change, you have questions on how you are currently invested or you just want some reassurance that your Investment Objective is right for you; we welcome your call to discuss and review as much as necessary.

If you are taking advantage of the summer months for vacation, we wish you the very best for a relaxing and refreshing time away. Rest assured that the Lucas Capital office is open every business day. There is always someone here to answer the phone and help you with any of your financial needs.

We appreciate the loyalty and trust you have given us.  If you know any friends or family members who would benefit from working with Lucas Capital, please share our contact information. We are happy to provide a “second opinion” with no obligation that could be especially important in the current environment.

Be sure to let us know if your family circumstances have changed in a way that could alter your investment profile and objectives. We welcome your questions or comments, or would be happy to review your financial situation or portfolio at your convenience. A copy of Lucas Capital Management, LLC’s ADV is always available upon request.

Sources:

  1. National Bureau of Economic Research, https://www.nber.org/cycles/cyclesmain.html
  2. Financial Times, 7/4/19, https://www.ft.com/content/6f8c3308-9d04-11e9-9c06-a4640c9feebb
  3. Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
  4. University of Michigan, http://www.sca.isr.umich.edu/
  5. Federal Reserve Bank of St. Louis, William Emmons, 6/28/19, https://www.stlouisfed.org/publications/housing-market-perspectives/2019/ recession-signals-home-sales-lower
  6. Wall Street Journal, 7/9/2019, https://www.wsj.com/articles/government-bond-market-measure-says-recession-risk-growing-11562690652
  7. U.S. Census Bureau, 7/16/2019, https://www.census.gov/retail/marts/www/marts_current.pdf?mod=article_inline
  8. Bloomberg, 7/2/2019, https://www.bloomberg.com/news/articles/2019-07-02/grim-earnings-forecasts-are-getting-worse-by-the-week-in-s-p-500

NOTE:  This report has been prepared for the discretionary account clients of Lucas Capital Management LLC (LCM) only and is not intended for the general public.  The intention of this material is to provide the basis for investment decisions made by LCM on your behalf.  The opinions expressed in this report are those of Lucas Capital Management.  Information contained herein is based on sources we believe to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed.  Any opinions are subject to change without notice.  This report is for informational purposes only and is not intended as an offer to sell or a solicitation to buy securities.  This report may not be reproduced or distributed without our permission and is a service provided exclusively for our clients.  Lucas Capital Management and its affiliated companies and/or associated persons may, from time to time, have positions in, or options  on the securities discussed herein and may make purchases/sales while this report is in circulation. More information is available upon request.