2nd Quarter 2019 Client Update Letter

Introductory Note

I have decided to start publishing my Quarterly Client Update Letters as True Vine Letters. Going forward, all True Vine Letter subscribers will be able to read them here. Please note that these Update Letters are geared for a wide client audience. In them I strive to communicate complex investing topics in a simplified manner to help all my clients at least have a general understanding of my market outlook and investment strategy.

Patiently Optimistic

U.S. Stock Market Hits New Highs 

The U.S. stock market as measured by the Standard & Poors 500 Index of 500 of the largest and most prominent U.S. companies hit a new all-time high during the 2nd quarter of 2019. The following chart shows the weekly price performance of this index going back to 2012:

courtesy of barchart.com; click to enlarge

Despite the ongoing U.S. - China trade drama and a weakening global economy, the U.S. stock market has been buoyed by the view that the U.S. Federal Reserve is going to lower short-term interest rates. The world’s major central banks are now moving towards looser monetary policies that are generally perceived positively by stock markets.

Deploying New Money Into Value

With U.S. markets at all-time highs and the valuations of many industry groups stretched it is important to not be overpaying for stocks. I have been focused on deploying new money into undervalued areas. One of these is U.S. banks. I am in good company here as Warren Buffet has been doing the same. U.S. banks are generally healthy, growing, relatively undervalued, and pay above average dividends. My longer-term view is that interest rates are going to keep rising. This benefits banks, especially the regional players like BB&T, Fifth Third Bank, M&T Bank, PNC Bank, and U.S. Bancorp. The following weekly price chart is for an index of regional banks:

chart courtesy of barchart.com; click to enlarge

You can see here that regional banks are well off their early 2018 high, but have been moving higher this year. I expect this index to move higher out of this funnel pattern, potentially from an increase in longer-term interest rates. I see banks as generally poised to outperform the broader stock market over the second half of 2019.

Banks core business is paying scant levels of interest on deposits while lending for higher rates. As interest rates rise, banks can earn more profit as long as they can keep the level of interest they pay on deposits down. The longer they can secure deposits, the better. This is why banks sell CDs and why they pay you a bit more if you buy ones that mature at a later date. It is important to understand that when you put money in a bank, via checking, savings, money market accounts, or CDs that you are not really just putting money in a bank to magically earn interest. You are effectively lending the bank money at a lower rate to fund their lending operations at higher rates. You are a source of funds for their business. The implication is that it is generally better to own the shares of quality banks than to put a lot of your money in low-interest deposits.

Preferred Stocks Of Quality Banks Are Attractive

The largest banks don’t just fund their operations with deposits. They also issue preferred stock. Preferred stock is higher in the capital structure than regular common stock (common stocks are what people mean when they simply talk about “stocks”). If a bank or company goes bankrupt, preferred stock shareholders get paid before common stock shareholders. I have also been buying preferred stock of a select group of higher quality regional banks. These preferred shares are generally paying dividends in the 5% to 6% range. In the current environment, I find this to be a good way to increase the level of income in portfolios while reducing risk since preferred stocks generally have less risk than regular common shares.

Longer Term Interest Rates Have Fallen

The following weekly price chart is for the U.S. 10-year treasury bond:

chart courtesy of barchart.com; click to enlarge

After bottoming 3 years ago, the 10-year U.S. government bond yield rose from 1.5% to about 3.25%. It has since fallen all the way back down to the 2% level but is staying above the previous upper trend line and is beginning to move higher again.

When rates were higher I bought some bonds and bond funds that benefited from this decline in interest rates (bond prices and interest rates move in the opposite direction) and have since unloaded all of these at what I now think will prove to be another bottom in interest rates. Portfolios are heavily positioned in variable rate bonds that will outperform if interest rates rise. Coincidentally, if I am right about interest rates, now is a good time to take out a mortgage or a home equity line of credit if you or someone you know is shopping for one. These types of loans are priced off of the the 10-year U.S. government bond so rising longer-term interest rates would lead to higher interest rates for these types of loans.

Conclusion: Positioning Against The Grain

To some up my current market outlook & investment strategy, I expect the global economy to rebound and I am still positive on stocks. That being said, I am not “all-in” on stock allocations in portfolios and have ample amounts of conservatively invested reserves to add to stocks if the market has a meaningful late summer/early fall pullback. If you turn on the TV and see the fear mongering about the stock market falling you can rest assured that I am using it as an opportunity to do some buying. Investing is all about leaning against the grain to constantly be buying low and selling high. I have strict valuation parameters in place to ensure that I am only putting new money to work where there is undervalued opportunities. This is the primary way that I am working hard to serve my clients.

Thank you for your business and enjoy the summer.

Joshua Hall, ChFC


The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, and a Registered Investment Advisor in the U.S.A. The information presented is for educational purposes only and should not be regarded as specific financial or investment advice nor a recommendation to buy or sell securities or other investments. It does not have regard to the investment objectives, financial situation, and the particular needs of any person who may read this Letter. In no way should it be construed as personalized investment advice. True Vine Investments will not be held responsible for the independent financial or investment actions taken by readers. All data presented by the author is regarded as factual, however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive evaluation of financial strategies or specific investments and consult a professional before making any decisions. Positive comments made regarding this Letter should not be construed by readers to be an endorsement of Joshua Hall’s abilities to act as an investment advisor.