Marketline Monthly – July 2018

Domestic Stocks

Most of this year, stocks have see-sawed between gains and losses, but July brought a change as the indexes broke out of their malaise. The Dow increased by 4.7% – a very good month for these thirty names; the S&P was up 3.6% and the Nasdaq lagged at 2.2%. These results are somewhat reflective of technology returns; the Dow contains less tech than either the S&P or the Nasdaq, and the Dow’s tech components tend to be ‘old world’ companies like IBM rather than Facebook. Speaking of which, big declines at both Netflix and Facebook this month were part of the month’s returns affecting the S&P and the Nasdaq. Still, excellent earnings are propelling stocks upward, just like in January – the first major earnings reporting month of the year.

A shift towards value seems to be afoot. Sectors that have lagged the tech driven boom of the last several months are having a day in the sun. Industrials, healthcare and food companies, all of which have had a rough go in the last year or so, took off in July. Financials – another value favorite – had a decent month, too. Small cap stocks have performed better lately, after sluggish returns in two of the last three years, though some of that action is concentrated in what we consider to be junky names with no earnings and high valuations.

Meanwhile, debate rages on regarding whether the bull market is near an end. Cash inflows to stocks have been fickle lately, with investors selling stock mutual funds very heavily in late June and early July – money that wasn’t invested for the good returns in July. Now that returns have shifted, we are back to positive flows to stocks once again. Investors appear nervous and are seemingly taking out their nervousness by selling down equity positions. It’s an ironic fact that when investors are worried, stocks tend to be rewarding. Inflection points usually come when no one is expecting them – often when everything looks great.


If the bull market in stocks is a point of debate, it barely compares with the chatter over the potential inversion of the yield curve. By now we have seen articles in every major business media outlet about yield curve inversion. These articles fall into two camps: 1) Curve inversion is a worry and we’d better beware and 2) Curve inversion is not a worry because things are different this time (rates are low, the curve is manipulated, etc).

The “things are different” argument never flies long term. We heard “things are different” back in 1999, when dot com companies were coming public at huge valuations with nothing more than a business plan sketched on a cocktail napkin. That turned out to be false. High valuations eventually make someone – usually many “someone’s” – very unhappy. The “things are different this time” pronouncement was famously common before the credit crisis, after huge amounts of capital flooded into housing –activity that ignored multiple precedents showing that large capital flows into a narrow segment of the economy routinely results in bursting bubbles; and then just months later, “things are different this time” struck again, when folks were convinced we would never come out of the recession. Arguments about the yield curve inversion have focused on historical outcomes post-inversion (not rosy), the number of basis points of inversion, and where it inverts. However, no one is addressing the elephant in the room which is: why exactly won’t the long bond go up in yield? That’s the real question. We love the long bond because largely, it is not manipulated – it’s the ultimate crowd-sourced opinion. And the level of the long bond is saying, “we think growth will be inflation-less, and low long term.” Can the long bond be wrong? We don’t know, but historically, it has a very good record of being right.

International Stocks

Trade disruptions are playing havoc with foreign investments, but growth issues have cropped up independent of trade. Germany has shown some fits and starts in its production figures, Europe generally appears to be slowing; China’s stocks are either in or approaching a bear market. Brazil, a very volatile market, might benefit from Chinese buying now that it faces tariffs on US goods. Consequently, results were all over the map this month. Brazil surged over 8%; the Hang Seng was down -1.3%. The FTSE European index managed a rise of 1.5%. Canada, despite strong timber and oil prices, was stuck at 0.9% amid a strong economy that’s prompting a tide of rate hikes by its central bank. Mexico was another standout, up 4.3% after an election that brought a change of party to the presidency, generating optimism on several nagging issues including corruption, violence and trade.

Marketline Monthly is produced by Cascade Investment Advisors, Inc. We specialize in value investing for individuals. We apply our approach across markets, looking for low-priced securities that offer above-average potential. We use imagination and hard work to bring performance and personal service to our clients. To learn more, contact Michelle Rand at 1.503.417.1950 or 1.888.443.9015; email to Our website is A full list of stocks we invest in is available on request; mention of specific securities is not investment advice; such investments may or may not be profitable.