We hope your 2019 is off to a great start! We wanted to give you all an update on the equities in your accounts. As you know, we sold all equities on December 21, 2018 when our long-term indicator turned negative for the first time since January 11, 2016. This is only the sixth time in the last 20 years that this indicator has turned negative. This 20 year period is illustrated in the following chart:
As you know, our buy/sell discipline requires that we sell equities when this indicator turns negative and purchase equities when this indicator turns positive. Below is a chart showing the current position of the indicator. As you will see in that chart, our indicator remains firmly negative.
As you will notice from the above referenced chart, the first three weeks after the equities were sold have been positive for equities. However, based on the very light volume for those three weeks and other factors, we believe these short term gains appear to be a relatively simple, straight forward, bear market rally. A 50% retracement of such steep losses is common. Upon completion of this retracement towards the upside we anticipate the down trend to continue. Market action the last few days may be confirming this assumption.
The market seems to be very interested in the government shutdown and how long it will last. This is now the longest government shut down in history and the effects will begin to be felt in the overall economy. Economists from J.P. Morgan and Bank of America Merrill Lynch said shutdowns typically result in temporary hit of 0.1 to 0.2 percentage points to GDP for each week they continue. Credit rating agency Fitch said the U.S. AAA rating is at risk if the government shutdown continues.[i]
All the proceeds from the sale of equities have been placed in a money market fund. This fund is currently yielding approximately 2.08%. Should the equity market deteriorate further, we may consider moving these funds into a high quality bond fund. We will certainly let you know prior to making this change.
Should you have any questions or comments please do not hesitate to contact us.
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