“Good Times, Bad Times, You Know I’ve Had My Share”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA



February 25, 2019 – DJIA = 26,031 – S&P 500 = 2,792 – Nasdaq = 7,527

“Good Times, Bad Times, You Know I’ve Had My Share”[i]

Reviewing the past 3 months in the U.S. financial markets, we had the worst “December” since 1931, which was within the worst quarter since 2011.  Then we had the best January since 1987 that has extended to a 9 week winning streak for the Dow Jones Industrial Average, the Nasdaq Composite, and the Russell 2000 (the S&P 500 rose for the 4th consecutive week last week).  This sets up the best yearly start in over 25 years for the stock market.

The Dow and S&P 500 are approaching their September all-time high levels which few would have predicted at the end of December.  Certainly, the 20% selloff and subsequent rebound provide ammunition for the passive/buy and hold investors.  Why try to time the market if you are confident that selloffs will always be temporary?

Undoubtedly, Wall Street’s bears have been caught off guard with the stock market recovery.  There were many calls that December’s selloff was the start of a long and painful bear market.  Their crystal balls didn’t predict a broad two month rally.  The only people having a worse 2019 are the main stream media with their premature conclusions covering the Covington Catholic and Jussie Smollett stories.

It is said that Wall Street climbs a wall of worry.  This refers to the logic defying situation where markets are strong in the face of bad news. When this happens, it is a confounding backdrop and many are left scratching their heads.  This takes place regularly and could be a function of oversold conditions where all the negative news flow has already been discounted.

The great start to 2019 might be another example of “climbing a wall of worry”.  Certainly, the headlines are providing enough bricks, stones, and concrete to build a tall and sturdy wall.  First, December’s retail sales report was horrific.  It was the weakest monthly report since September 2009 or in the midst of the financial crisis.

Some other problematic data include a large drop in small business optimism, signs of weakness in the housing market, and notable softening in purchasing manager data.  Obviously, this has not discouraged investors.  And while it might be a classic “wall of worry”, the bears would suggest it’s “whistling past the graveyard”.

While the market skeptics have valid concerns, the bulls have an overpowering force on their side – the Federal Reserve.  Fed chairman Jerome Powell began to change his message from monetary hawk to dove in late December.  It continued in early January when he stressed words “patient” and “flexibility” when speaking about future interest rate increases and reduction of the central bank’s balance sheet.

Since then the accommodative rhetoric has increased.  The Fed sent out a slew of speakers last Friday featuring New York Fed President John Williams and Fed Vice Chairman Neil Clarida.  Mr. Williams addressed inflation targeting and the Fed’s inability to reach its goal.  Vice Chairman Clarida offered that the Fed will consider new monetary tools, if needed, including radical policies such as capping Treasury bond yields.

The bears are quick to point out that, despite recent bad news, the economy is expanding.  It’s puzzling that this dialogue is taking place within growth conditions.  There are many that think the Fed’s fickleness is all in response to the falling stock market.  Further Fed critics propose that the central bank panicked over the market turmoil during the 4th quarter and is sending the wrong message to the global capital markets

This has reinforced the belief that the Fed adjusts monetary policy not on economic developments but to protect the stock market.  This is known as the “Fed put” meaning that traders and investors don’t need downside protection because the Fed will take care it.  Anytime the market goes down, the Fed will step in to increase liquidity and reduce interest rates.  The criticism is that this distorts the markets role of price discovery and actually increases systemic risk.

It’s been 10 years since the financial crisis and these extreme policies are considered the solution.  Over 22% of the world’s debt trades at a negative interest rate.  The European Central Bank controls the continent’s bond market.  China has flooded its economy with over $1 trillion of liquidity in past two months as it tries to patch its financial potholes.    All this intervention (manipulation) is supposed to help the markets trade normally yet these are far from ordinary markets.  Maybe central banks are the problem.

If the stock market is the measuring stick, things are fine.  As mentioned, prices have stabilized and bounced from the Christmas Eve lows.  They have recovered back to levels in early December but remain below the all-time highs reached in early October.  Here are the major averages’ 2019 returns.

Dow Jones Industrial Average 11.6%
S&P 500 11.4%
Nasdaq Composite 13.4%
Russell 2000 17.9%

The Dow and the S&P 500’s strong yearly start could be a sign of more good things to come.  According to Dow Jones Market Data, when these two indexes rise 10% or more in the first two months, it often leads to further gains.  The graph below shows previous years when this happened.

As shown, it breaks out January and February versus the remainder of the year.[ii]  The two exceptions of when the rest of the year diverts from the direction of the first months are notable.  After a strong a start in 1987, stocks crashed in October.  In 1931 stocks began the year higher and then fell as the Great Depression was started to set in.

Analyzing the financial markets in 2019 has an added factor of bad news is good news and good news is bad.  This is because if there is enough bad news, the Fed won’t raise interest rates.  And if the Fed doesn’t raise interest rates that’s good news and stocks will go up.  And then this becomes bad news because the Fed will look to raise interest rates like in 2018.   And then this will cause the stock market to go down and the Fed will hold off which is good news.  It’s like Bud Abbott and Lou Costello are running monetary policy.

Although its’s never easy, the wild crosscurrents ripping through the world’s capital markets makes investing decisions more difficult than usual.  And within this backdrop, relying on the ability of global central bankers is not a safe strategy.  Let’s enjoy the good times while keeping an eye for the bad times.





[i] Page, Jones, Bonham, Plant, October 1968

[ii] The Wall Street Journal, February 22, 2019

“You’ll Like This Guy. He’s All Right. He’s a Goodfella, One of Us.”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


February 4, 2019 – DJIA = 25,063 – S&P 500 = 2,706 – Nasdaq = 7,263

“You’ll Like This Guy. He’s All Right. He’s a Goodfella, One of Us.”

Two weeks ago President Trump and the Democratic leadership agreed to end the federal government shutdown.  The continuing resolution calls for three weeks of funding while negotiations for a long term answer will take place. The status of Speaker Pelosi’s European/middle east trip was not mentioned.

This shutdown set longevity records as the opposing sides dug in.  And while some economic reports were delayed which could be a problem in gauging economic progress, Wall Street seemed unconcerned about the government employees who were out of work.    On the other hand, it was very concerned with some Washington workers who remained at their desk.

To the dismay of some, Federal Reserve chairman Jerome Powell (technically not a government employee) punched the time clock each day. And while he had no direct involvement in the government’s closure, Mr. Powell has recently received investors’ wrath.

Stock market bulls are blaming the Fed’s less accommodating posture for the financial markets’ 4th quarter mayhem.  To be sure, monetary policy changed in 2018 – interest rates were going up, not down, and the Fed was no longer buying bonds (monetizing debt).  This certainly left its mark and played a role.  But there are more issues beyond Fed policy that have contributed to the financial markets’ chaos.

Before discussing the why, let’s review the what.  As measured from the highs in September to the lows in late December, the major indexes tumbled approximately 20%.  December was worst ‘December’ for the Dow Jones Industrial Average and S&P 500 since 1931 and it was the worst monthly drop since February 2009.  For the Dow and S&P 500 it was the worst quarter since 2011 and for the Nasdaq it was the worst since 2009.

With the New Year came a new direction.  The S&P 500 rebounded 7.9% last month which made it the best ‘January’ since 1987 and the best of any month in over 3 years.  Given the severity of the selloff, a bounce was not a surprise.  The bears view it as a “dead-cat” variety while the bulls think the lows are in and this is the start of a longer lasting move.

Returning to the Federal Reserve, they raised the short term interest rate in December which was the 9th time since December 2015.  It’s easy to forget that when this string of increases began the overnight interest rate was at 0%.  Further, it is also easy to forget that the rate had been at 0% for 7 years!

This series of rate increases is the Fed’s attempt to normalize monetary policy 10 years after the financial crisis.  The debate concerning the overnight lending rate’s appropriate level has been a hot topic within the financial markets for the past several years.  However, this discussion intensified in the second half of 2018 especially as forecasts for 2019 added 2 to 4 more increases combined with signs of global economic weakness.  Investors feared that the Fed was determined to raise interest rates and reduce their balance sheet which could accelerate any economic slowdown.

Certainly this could have contributed to the markets’ 4th quarter upheaval.  But there are some other problems.  China has been coughing some hairballs in form of some very soft data.  Also, two large peer to peer leading organizations failed.  These are companies that gather investor capital and then lend and invest it – similar to a bank but without branches.  There are estimates that this Chinese lending sector has over $200 trillion of loans.  It’s hard to know the fallout of these failures but it could be material.

No man is an island.  Likewise, no country is isolated in today’s international financial system.  So naturally, China’s slowdown has an influence beyond its borders and perhaps the biggest impact is felt in Germany. China is one of Germany’s largest export markets and has contributed to declining activity in Europe.  Germany is the largest economy in the EU and the 4th largest in the world.

Closer to home, there are other market worries besides the Federal Reserve.  The federal government shutdown obviously causes uncertainty and disruptions.  It also made an already chilly political environment colder which doesn’t help consumer and business confidence.

This all may turn out to be much ado about nothing as the Fed has quickly had a change of heart on playing the villain.  Fed Chairman Jerome Powell has retreated on future interest rate cuts and balance sheet reductions.  He recently used word like “patient” and “flexibility” referring to future policy decisions.  This is a change from the projected interest rates hikes for 2019.  The news has greatly emboldened the bulls as they believe that the Fed has their back once again and won’t let the stock market get too sloppy.

The Fed has long been “data dependent”.  This is kind of a sophisticated way of saying “we are not sure what to do so we’ll wait for the economic reports and then react” (As a side issue, the Fed has a payroll of over $5 billion per year. One might ask, “If you relying the data to formulate their decisions, why are you paying all those PhD’s?”)

Importantly, this latest flip from tightening to neutral (and possible loosening) contradicts the economic data.  We have record low unemployment, corporate profits are very strong, and the highest GDP growth in many years.  This illogical shift of position is both significant and puzzling.  The answer is related to the unstable stock market.

The Fed will not admit that they are using the stock market as an indicator for policy.  This is despite claims by skeptics that the central bank intensely watches (and supports through strategic intervention) the stock market.  A quick look at a collection of statements from Jerome Powell provide some insight.

On October 3rd, Chairman Powell referred to the Fed’s stance as “a long way from neutral”.  In others words, expect more interest rate increases as the economy was strong.  In November he said the rate, which was around the same level at the time of his October statement, was “just below” the appropriate level.  How did we go from “a long way” to “just below” neutral?  The stock market fell 10% in between those comments.

In December the Mr. Powell offered some more stern comments about the reducing the Fed’s balance sheet (tightening) only to reverse course on January 4th.  It was at the January presentation that he used more conciliatory words.  Since then stocks have spiked higher giving us the best January in over 30 years.

Tying monetary policy to stock prices sounds innocent.  However, if investors are confident that the Fed will prevent any serious decline, prices can easily climb to extreme levels and risk becoming a bubble.  Further if interest rates are too low relative to economic strength, there will be misallocations of capital.  This is what helped inflate the housing bubble last decade as the Fed kept interest rates too low for too long.  As you may remember, this was the solution used to fix for the Dot Com stock market bubble.

The Federal Reserve is trying calm the financial markets after the recent turmoil.  It’s soothing language and signals worked in January.   However, the unintended consequence could turn out to be enhanced systemic risk as assets are mispriced.  And overvalued financial markets in an overleveraged global systems with slowing international economies could get much worse than 2018’s 4th quarter.


2018 3rd. Qtr. Kildare Asset Mgt.-Kerr Financial Group client review letter

The following is a copy of the 3rd quarter letter sent to clients. It reviews the markets and the client account’s activity and performance for the 3rd quarter and year to date 2018.

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


Economic statistics tell a story that the financial markets interpret and, ultimately, convert into prices at which trades occur.  Of course, understanding the data is only one part of the process.  Another critical step is the interrelationships between the various statistics as well as the magnitude of their importance.  In other words, some data influences other economic reports and some statistics have greater importance than others.

For example, the monthly employment report is given much more attention than a release on business inventories.  This is natural as jobs growth has a widespread economic influence as it directly impacts things such as consumer spending and inflation (through wage growth).

As sign of its importance, the financial world seems to stop on the first Friday of the month at 8:30 AM eastern time when the U.S. employment report is released.  It is amazing that this news release attracts so much attention with countless beforehand forecasts and then subsequent dissection of the details.  All this hype for a report that is revised numerous times in the months following its original release.

Accurately analyzing the various economic numbers is a significant step in making good investment decisions.  However, an additional part of navigating the markets goes beyond the economy.  Politics, fiscal policy, and international relations impact stocks, bonds, currencies and commodities.  Reviewing 2018’s 3rd quarter, investors had to deal with a lot of this news.

The domestic economic news was strong.  During the quarter, we learned that the estimated growth rate for the U.S. economy was 4.2% and it was the best back to back quarters since 2011.  The unemployment rate fell to 3.7% in September which was the lowest rate since 1969.  These broad numbers translated into surging corporate earnings.

It was a much more challenging quarter for the international economies.  Headwinds such as rising crude oil prices and a stronger U.S. dollar resulted in painful obstacles for some countries.  Nations that have to import oil (India and Japan for example) encountered higher commodity costs.

Within emerging markets, Turkey and Argentina were pressured by the stronger U.S. dollar that ended up stressing their financial systems. The Italian budget dispute added uncertainty to the international financial system.  And, of course, talks over tariffs generally hurt global trade.

The result was a disturbing divergence between the rest of the world and the U.S. stock markets.  At the end of September, the Dow Jones Global index (excluding the U.S.) showed a year-to-date decline of 5.2% while the U.S. indexes traded near all-time records.  Here is a list of 2018 year-to-date returns through September for some noteworthy international indexes:

Shanghai Composite (China) -14.70%
Hang Seng (Hong Kong) -7.10%
Nikkei 300 (Japan) 1.30%
DAX (Germany) -5.20%
FTSE (London) -2.30%

To compare, here are the U.S. major indexes.

3rd. Qtr 2018
Dow Jones Industrial Average 9.0% 7.0%
S&P 500 7.2% 9.0%
Nasdaq Composite 7.1% 16.6%
Russell 2000 3.2% 10.5%

Today’s global economic system is interwoven through trade and the financial system.   The separation in direction between the foreign stock markets and the U.S. averages is noteworthy.  Obviously, there are times when one country or area outperforms the rest of the world, but for the U.S. stocks to be moving in a dramatically different direction from other major indexes is worrisome.

I included the chart below in a September newsletter.  The two lines are the S&P 500 (blue line) and the Vanguard All-World Index that doesn’t include the U.S. markets (red line). It clearly shows the two indexes trading closely together before diverging in May.  Since then, the gap has widened.

Focusing on the U.S. stock markets the 3rd quarter saw a continuation of the recovery from the painful drop in February.  As a reminder, the Dow was down year-to-date at the end of June while the S&P 500 showed very modest gains.  In the 3rd quarter, the Dow and S&P recaptured the losses from earlier in the year and traded to new record highs in September.  As mentioned in the September newsletter, the markets’ leadership was narrow with the four largest U.S. stocks accounting for 50% of the S&P 500’s gain in 2018.  This was disconcerting as advances with more participation are normally more sustainable.

Using a size weighted average, here is how the average Kildare Asset Management-Kerr Financial Group client’s account performed. This is calculated after all fees and expenses.


3rd Qtr 2018
Kerr Financial Group – Kildare -0.46% 6.19%
Asset Management


Normally I review some of the details of your account during the quarter, but, given recent market developments, it’s important to review October and November. October was the worst ‘October’ since 2008.  Also, it was the worst of any month since 2011.  Recently there have been rough months such as August 2015, January 2016 and February 2018.  While these suffered monthly losses, October 2018 exceeded them

Some important changes in the market backdrop have taken place.  The U.S. dollar has risen in value as compared to other currencies.  This has strained some foreign financial systems and, with today’s global system so connected, any small problem can have far reaching impacts.

Interest rates have moved higher in the U.S. throughout 2018.  This has been partially driven by the Federal Reserve on the short end of the yield curve but also driven by the markets.  There is a lot of debt in our economic system and higher interest costs will be a problem.

Lastly, 3rd quarter earnings reports were released in October and the numbers were good.  However, guidance and forecasts for future profits were lowered which surprised the Wall Street.  The markets are continually discounting future events and if profits are expected to be flat or lower, market prices will decline.

I have tried to use various hedges in client accounts together with cash balances as an attempt to avoid the declines.  October’s action was so widespread that this wasn’t as effective as anticipated.  As a result, I have raised more cash and will likely continue to do so if markets don’t begin to stabilize.  Ultimately, this will provide ammunition when prices reverse this decline.

Please feel free to call with any questions.  Thank you for your business and continued confidence placed in me.

Jeffrey J. Kerr, CFA

Kerr Financial Group

Kildare Asset Mgt.

45 Lewis Street – Lackawanna RR Station

Binghamton, NY 13901