Volatility, Headlines, and Fundamentals

As we enter the second quarter of 2018 stock markets are relatively flat for the year. Investors are on edge as volatility has returned to the markets and there has already been over 3 times the number of 1%+ price moves in 2018 versus 2017 and we’re only 3 months into the year. See the chart below:

Investors seem to be focusing on a number of unsettling headlines these days and ignoring the strong fundamentals of the market. What are investors worried about?

  • Tariffs and a trade war with China
  • Political headlines and tweets
  • Fear of rising interest rates and inflation
  • Facebook and other data-privacy issues

These are worrisome issues, but in reality:

  • New tariffs have yet to be implemented against China. Talks will be taking place between the US and China and both sides already seem to be softening their stances
  • Social media tweets seem to be the new normal coming out of Washington and we’ll just have to get used to them
  • Data breaches have been taking place for years, and now that Facebook’s CEO has testified in front of Congress this particular issue should fade
  • And finally, interest rates are still at historically low levels and inflation is contained

In the midst of all the headline noise and increased levels of volatility I think investors are overlooking the fact that market fundamentals are quite strong right now. I’d like to highlight a few things I think investors should be focusing more on.

First, the economy is quite robust right now. GDP continues to grow north of 2% on a year over year basis. See below:

The unemployment rate is currently 4.1%, a 17 year low. See below:

Importantly, corporate profitability of the companies we invest in is stellar right now. In fact 1st quarter earnings are forecast to grow 17% year over year. That is the highest growth rate since Q1 of 2011. See the positive ramp of 2018 quarterly earnings below:

Finally, as stock prices have stalled out and earnings have gone higher, stock market valuations have gotten cheaper. See how the Price to Earnings (PE) multiple of the S&P 500 has moved lower recently below:

In summary, there are issues out there in the markets (there always is). There is also a lot of headline noise we’ll be bombarded with on a daily basis. Perhaps some of these issues will manifest into problems for the fundamentals of the market, but for now they are still more noise than thesis changing. On the flip side, core fundamentals of the market (the economy, corporate profitability and valuation) are quite compelling. Add in tax reform, low interest rates and benign inflation and we feel the backdrop for positive equity market returns in 2018 is still a reasonable expectation.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on April 13, 2018 Read More

First Quarter Market Review

The first quarter was a wake-up call to all investors enjoying an extended period of higher stock prices, low volatility, and stable low interest rates. After multiple record setting stock market highs in January, the long awaited market correction became a February reality as stock prices fell 10% from their all-time highs. March provided additional price volatility as the market was left to negotiate a sea of cross currents.

The economic and political issues surfacing in the first quarter will continue to impact markets into and beyond the second quarter. The passage of corporate and personal tax cuts will provide fiscal stimulus to the economy. Simultaneously, the Federal Reserve is tapping the economic brakes by tightening monetary policy. The hot debate is whether there will be three or four rate hikes this year. The Fed raised the benchmark fed funds rate by a quarter percentage point to the 1.50-1.75% range in March.

The talk of tariffs and trade wars has the market on edge, adding to investor uncertainty. Quarterly corporate earnings releases will begin anew in mid-April. This round will be especially important as the market begins to reassess 2018 earnings estimates. The FAANG stocks (Facebook, Apple, Amazon, Netflix and Google/Alphabet), have provided long-term leadership to the stock market, and now these stocks are being stress tested. Geo-political risk is a constant worry, but tensions here are currently running high. Bottom line: expect market volatility to remain elevated.

Despite all the noise and heightened anxiety, markets were down but not out in the first quarter. The Dow Jones Industrial Average endured two 1,000-point plunges but lost just under 2% for the three month period. This snapped a streak of nine consecutive up quarters for the Dow. Other major equity averages around the global were mixed for the quarter. The NASDAQ 100 and the MSCI Emerging Markets finished the quarter slightly positive while the MSCI EAFE and S&P 500 were slightly negative. From a sector standpoint, information technology +3.2% and consumer discretionary +2.8% were the biggest quarterly winners with telecom services -8.7% and consumer staples -7.8% the biggest losers.

In the bond market, prices declined as interest rates rose and credit spreads widened. For the quarter, the benchmark 10-Year U.S. Treasury yield jumped 34 basis points to yield 2.74%. The yield curve continued to flatten. The 2-Year Treasury rose by 38 basis points to end the quarter yielding 2.27%, while at the long end, the 30-Year Treasury rose 23 basis points to 2.97%. Despite the slow start to the bond market, we expect bonds to claw their way back to even by year end as future income will offset early year price declines.

Long-term investing is a marathon, not a sprint. In the big picture, the nine year bull market has done wonders for those investors with a long-term focus. Economic fundamentals are still very positive and can propel this market higher from here. Price corrections in the 5-10% range are normal and actually help create opportunities to buy at better valuations while providing further legs to bull markets. Stay patient, stay positive, stay invested.


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on April 3, 2018 Read More

An Overview of International Stock Markets

International stocks can be a significant component of investor portfolio allocations. However, many of the differences between US and International stock market indices may not be widely known. In the following market reflection, we will provide an overview of international markets, including some of the differences in composition to US markets as well as a comparative analysis of performance.

What comprises “international stock markets”?

Simply stated, international stock markets are made up of all markets outside the US. A good proxy for international markets is ACWX, an ETF based on the MSCI All World Country Index, Ex-US. The following charts reflect data from the index and ACWX to compile a breakdown of international stocks.

Based on the above data, a few observations:

  • Developed markets (like Europe, Japan, Australia) represent 80% of the total international market
  • 5 countries (Japan, UK, China, France, Germany) represent 50% of international markets
  • China is, by far, the largest emerging market. It represents 38.5% of emerging market stocks
  • On a sector basis, Financials (23.6%) is the largest represented sector in international markets compared to Technology stocks (25.2%) being the largest sector in the S&P 500

Performance versus the US markets

2017 was a strong year for international markets. The below chart reflects performance over several periods for US Large Cap stocks (blue bar), International Developed Stocks (orange bar), and Emerging Markets stocks (gray bar). International stocks, both developed and emerging, outperformed US markets in 2017. However, over longer periods, the US markets have outperformed international stocks.

International growth versus value

In regard to US markets, growth stocks have significantly outperformed their US counterparts in 2017 and into 2018. This trend has been seen in International markets as well. The below chart reflects performance of both US and international broad market, growth, and value stocks. In 2016 (blue bar), value stocks in both the US and international markets outperformed. In 2017 (orange bar), this trend reversed as growth stocks outperformed in both regions. Thus far in 2018, we have seen the same outperformance in growth in the US while the international stocks are more mixed.

Our international allocations and outlook

We are currently advocating for a balanced approach to US versus international stock allocations. While economic conditions and corporate earnings are favoring the US, valuations are favoring international stocks. Within our portfolios, there are several methods to gain exposure to international stocks.

  • The G40i provides growth and income from high quality, dividend paying international stocks. The G40i is a very strong complement to G50 allocations as the investment philosophy is similar, but is invested completely outside the US.
  • The ETF Endowment Series has allocations to international stocks across the conservative through growth spectrum.
  • The Gradient Tactical Rotation (GTR) invests in one geographic sub-sector through a rules based tactical strategy based upon price momentum. The current allocation is fully invested in Emerging Markets stocks

In closing, it is our belief that an allocation to international stocks can be beneficial for diversified growth in investor portfolios. We believe that providing various sources of portfolio return, which includes asset class, geographic locations, and sector diversification, creates long term portfolio benefits that may enhance returns and lower volatility over time.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.


Posted on March 27, 2018 Read More
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