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Should I Invest Now or Wait - Leading Economic Indicators for the US Economy - YouTube
Channel: Learn to Invest - Investors Grow
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Hi I'm Jimmy
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in this video I'm going to walk
through a quick
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review of where we believe
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the US economy stands.
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We're going to use some varying
economic
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indicators to see if we think a
recession
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is coming and therefore a meaningful
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pullback in the stock market.
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Or is the economy getting stronger
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and we think the stock market will
move higher.
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So how about we start
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with the S&P 500 so we could see
what the
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market in general has been up to.
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This is a one year chart of the S&P
500
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and I'm sure we all remember the
market pullback
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at the end of 2018.
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Since then the market's had a pretty
decent
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recovery.
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But if we switch to a five year
chart
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we can see that compared to the
first
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three years the past two years
haven't
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done all that much.
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So now that we know what's happened
to
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the stock market let's shift our
attention
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to the economy
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and ultimately to see if we can try
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to find the key drivers
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to the stock market.
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So there are some leading economic
indicators
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that generally do a good job of
predicting where
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the economy's going to go.
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One leading economic indicator is
housing
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this right here.
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This is a chart of housing starts.
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Basically this looks at how many
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housing units are being built.
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Oftentimes strong housing
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demand can lead to a robust
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economy as more houses
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get built.
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More people are employed more people
buy
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furniture appliances things
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like that. In general the theory
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is that the overall economy will
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be helped by a strong
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housing market.
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OK.
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So housing starts looked like it
pulled
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back recently which implies
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a potential weakness in the housing
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market which could be a bad thing
for the economy.
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Now this may also be associated
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with the fact that interest rates
went up a little
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bit which would in theory
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lead to higher mortgages
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but we'll have to see when we tie
all this together.
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So let's keep pressing on.
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Another good leading economic
indicator
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is to look at manufacturing.
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This is the ISM manufacturing
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PMI index.
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ISM is the Institute for Supply
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Management
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and this looks at manufacturing
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in the US
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and it looks like manufacturing did
in fact
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pull back from 2018
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which isn't a great thing for the
economy
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but it wasn't a huge pullback.
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And this index tends to be fairly
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volatile.
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So we probably shouldn't react
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to such a brief pullback.
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I often think it's important
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to look at a broader trend than
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a single pullback
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or a single month or a single period
of time.
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OK. So we've got two question marks
as
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far as the where the economy is
going right
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now. It doesn't look too great to
this point
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but it's not all bad news.
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This is a chart of unemployment
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and I pulled down as much data as I
could find.
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And you'll see that this chart goes
all the way back to the 1940s
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and I did this because I think
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it's important for us to realize
that unemployment
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is at one of the lowest levels in
history
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which is generally a good sign for
the economy.
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Along those same lines this
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is a chart of consumer confidence
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and as we could see consumer
confidence is climbing
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higher which is generally a good
sign for
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the economy.
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Now what consumer confidence
measures
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is it measures.
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In theory how confident people
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are about the economy
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for the near future.
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So the fact that unemployment is low
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and consumer confidence is high
makes
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a lot of sense
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and it gives us some positive
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indications about the economy in
general.
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OK. So now the housing indicator
that pullback
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we have manufacturing that pullback
in the past
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few months
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and those are some red flags
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but then we have unemployment that's
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very low especially compared
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to historical levels.
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And consumer confidence thats
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relatively high. Those are good
signs.
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So what do we think about the
overall state
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of the economy.
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Well earlier I showed a chart on
housing starts
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and that chart showed weakness.
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But there's another indicator that's
believed
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to be a leading indicator to housing
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and that's called pending home
sales.
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So the pending home sales indicator
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was created by the National
Association
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of Realtors.
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And basically what it does
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is it tracks the amount of houses
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that are currently under contract.
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So basically it means that
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somebody agrees to buy a house they
sign a contract
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but the House hasn't closed yet the
deal is
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not finalized yet.
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They say it takes about two months
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just short of two months on average
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to close a contract.
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So as we could see the pending home
sales
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number jumped in the last reported
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number that was at the end of
January.
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And if home sales starts climbing
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well in theory what's likely to
happen
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is that the housing market in
general
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is going to improve which should
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lead to an improved housing starts
number.
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Now if that were the case well then
three out of the four
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indicators that we looked at
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would have showed signs of strength
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and that would be a good thing for
the economy
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and ultimately for the stock market.
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And this leads me to where I believe
the economy
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is right now.
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Now personally I believe that we're
at an inflection
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point out of the indicators that
I've
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shown in this video.
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Well it looks like there are
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indicators showing positive signs
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and there's some indicators showing
signs
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of weakness.
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Now these aren't the only indicators
I've
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looked at. I did a much more
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thorough analysis.
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These were just most interesting
ones.
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But broadly speaking
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this was the consensus signs of
strength
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signs of weakness
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but ultimately this brings us to
where I think
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the portfolio should be.
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And I believe that our portfolios
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for me should remain fully
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invested at this point although
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there are signs of weakness.
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I believe that there are too many
signs of strength
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to be sitting on the sidelines
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but clearly there are warning signs
that we don't want to completely
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ignore those.
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Another indicator that
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deserves some attention it got a lot
of attention a few
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months ago is the yield
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curve and this is
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a chart of the current yield curve.
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And basically what we're afraid of
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with the yield curve is we're afraid
of it
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inverting which is basically
pointing
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downwards.
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Now if we would add the way it
looked six months
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ago. Well we can see that not
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too much has changed
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with the yield curve.
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It's still pointing higher which is
a good
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thing but it's still
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fairly flat.
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So I think it's something that we
want to keep in
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the back of our minds. We want to
continue to watch it.
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This is an example of something else
that
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it wasn't true. It doesn't it's not
terribly interesting
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piece of the story
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but I want to bring it up because I
did get a lot of attention
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and it deserves attention.
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So for me it doesn't seem that the
yield
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curve is significantly better
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or worse right now than it was.
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So what do we do with our
portfolios.
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Well for me it makes sense to remain
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fully invested
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but also perhaps take a defensive
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stance perhaps we shift
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some of our more aggressive holdings
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to some more defensive industries
something
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like utilities might make sense.
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This is a chart of utilities going
back about a year
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or so and as we could see it's had
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a pretty good run.
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Now this makes sense because if you
think by 2018
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which was a negative year for the
stock market
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well utilities as a defensive sector
so
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that would do well if the market was
roaring
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right now. Utilities that most
likely
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lagged.
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That being said when it comes to the
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economy in general
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and how we stay fully invested
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or where we invest more money
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I think it makes sense to repeat
this
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type of analysis in general.
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If I was sitting on the sidelines
right now
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I would come into the market
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but I come in a defensive nature.
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That being said do you think
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that we should do this type of
analysis
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more frequently perhaps on a
quarterly basis.
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I could create this type of video
look at different
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indicators and bring out what
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what I think is most useful.
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That to help us guidebook guide us
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with the overall economy.
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Let me know if you think that makes
sense in the comments below.
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Also I'm curious are you
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fully invested you plan on remaining
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fully invested.
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Are you shifting it all from a more
aggressive
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portfolio to a defensive portfolio
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or are you staying steady as she
goes
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Don't worry about it just stay
exactly how you
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are let me know what you think in
the comments below.
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If you haven't done so already hit
the subscribe
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button. Thank you for sticking
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with me all the way to the end of
the video
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and I'll see in the next video.
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