Market Notes from the CIO

March 23, 2018

Eagle, Colorado

Yesterday was a tough day in the stock markets. The DOW finished down 724 points, almost 3% for the day. The other indexes didn’t fare much better. The sell-off seemed to be largely based on fears that a trade war with China is now under way. Overnight news out of Asia would suggest that is accurate as stocks in Japan were down 4.5%, Shanghai down 3.38% and Hong Kong down 2.45%. We could be in for another wild ride when the market opens today.

Earlier this week the Federal Reserve bank decided to raise the overnight lending rate by 0.25%. The rate is still historically very low at only 1.5% and leaves the FED with little room to maneuver in the event of a new recession. The increase was expected by the market and the 10-year yield ultimately decreased on the news. If the 10-year yield continues to move down and the overnight rate continues to move up, we will see the yield curve invert eventually, and this historically precedes recession, although not immediately.

Under the surface of the Federal Reserve meeting there is one interesting fact on which I have seen very little reporting. According to Stansberry NewsWire,:

For 2018, the Fed was one governor short of having the forecast for 2018 go to four rate hikes from three. That is something that could easily be converted by the next meeting. For 2019, its outlook for rate hikes moved from two rate hikes to three.”

We will continue to monitor closely. 

From here, we expect to see another 2% or so of downside in stocks, before consolidating around their 200 day moving averages and pushing higher. Any closes below those support levels would cause us to rethink our mid to long-term bullish thesis. We have been watching for prices to retest the February lows and as a result we still have capacity to increase equity exposures across the board. As always, we will continue to follow our (tightened) trailing stop losses and “allocate to value” with the cash that is raised. We are still watching equity and bond correlations closely, but we saw some nice negative correlation yesterday, which is what we want.

Have a great weekend!

Shane Fleury, CIO

Elevate Capital Advisors

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