The S&P 500 Is Setting All-Time Highs

The US stock market, as measured by the S&P 500, continues to set new record highs rising more than 18% to start the first half of the year. The strong start in 2019 has recouped the poor performance of late 2018 as the stock market continues to set new highs. For the last decade, the stock market has consistently marched up, but has displayed some volatility along the way. This volatility (illustrated by the gold circles) can be seen in the chart below from

The question we often get: “Is it too late to invest in the stock market after the strong start to the year?” That same question has been asked many times the last decade. Looking at the results it wasn’t too late to invest at any time the past decade.  There will always be corrections in the market, but we feel the market will continue to grind higher over time. None the less, it may not be as smooth as it has been the last decade as volatility has picked up recently.

Some of the factors that give us comfort the stock market can continue to advance are:

  • The economy is still growing
  • The Federal Reserve has become more accommodating recently
  • Valuation is still reasonable

One of the common metrics for judging the strength of US economy is looking at US GDP (Gross Domestic Product) which is expected to grow around 2% for 2019. With economic growth still positive and unemployment near record lows, we feel the backdrop for stocks is still positive.

The Federal Reserve last month signaled a more dovish tone, putting interest rate increases on hold and adding the possibility of interest rate cuts. A lower interest rate environment is generally thought to be a positive for the stock markets.

With the large stock gains of the last decade, one would think the stock market is wildly overvalued, but that is not the case looking at forward P/E multiples. P/E multiple is a valuation metric that looks at the price of a stock (the P) divided by the earnings (the E) of that company. JP Morgan looked at forward P/E multiples of the S&P 500 for the last 25 years shown in the following chart.

The latest P/E multiple on the S&P 500 is 16.7x which is slightly above the 25-year average of 16.2x. While the stock market is not cheap, its valuation is only slightly above its 25-year average, which we believe is reasonable.

In summary, while the US stock market has performed well to start the year, we believe the conditions are in place to for the S&P 500 to continue to increase in value going forward.  Stock market performance may be more volatile than the past decade, but the fundamental drivers are still in place for markets to move higher.

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 July 10, 2019 Read More

Second Quarter Review

The second quarter was a microcosm of the previous three quarters.  The quarter began with U.S. stocks trading higher into uncharted territory.  The euphoria was short lived as expanded tariff concerns took center stage in May.  This resulted in a swift 6.5% stock correction.  Enter June and new market friendly comments from the Federal Reserve sent the stock market back into rally mode to finish the quarter on a strong note.  As stocks rotated from bullish to bearish and back to bullish again, the bond market was quite resilient.  Initially, long-term interest rates edged higher, but the mid-quarter stock correction, dovish comments from the Fed and lower global interest rates allowed yields to decline across maturities from 2-years to 30-years.

News on the economic front was generally positive in the second quarter.   First quarter U.S. GDP was initially reported at a 3.2% growth rate and later revised to 3.1%, still well above the 2.4% expected rate.  Economists are expecting 2019 GDP to produce 2-3% growth.  The strong consumer has been the backbone of this economy and key metrics such as personal income, personal spending and retail sales all gained this quarter.  The employment picture remains bright, and a 3.6% unemployment rate is the best in 50 years.  Despite new tariffs and a strong dollar, the annual inflation rate is still running very close to the Federal Reserve’s 2.0% inflation target.

The current U.S. economic expansion began 10 years ago and still has additional room to run in our opinion.  While growth has been modest throughout this recovery, the length of stable economic growth with low inflation has been impressive.  While the next recession may be a few years away, some early warning signs are worthy of surveillance.  An inverted yield curve has preceded the last seven recessions by 14 months on average.  The yield curve from the 3-month T-bill to 10-year Treasury note is currently inverted, but the more widely recognized 2-year to 10-year segment of the yield curve is still positively sloped with yields of 1.75% to 2.00% respectively.  International growth is slowing as strained trade relations pressure economic activity, but growth is still positive.  JP Morgan publishes a monthly multi-factor recession risk monitor; currently they project a 43% probability of a recession a year from now, up from a 25% probability a year ago.

Lost in all the headline noise is the fact financial markets are off to a great start this year.  Midway through the year most stock markets are enjoying double digit returns.  The NASDAQ Composite, S&P 500 and the Dow Jones Industrial Average are up 21.3%, 18.9% and 15.4% respectively.  The two key international stock benchmarks, MSCI EAFE and the MSCI Emerging Markets, trailed the U.S. markets but still posted 14.0% and 10.6% year-to-date increases.  Bonds, stocks and gold do not always move in tandem, but they have this year.  The Barclays Aggregate Bond index is up 6.1% year-to-date.  High yield bonds are also performing well, showing gains of 9.9% this year while gold is up 13.0%.

The second quarter market gyrations provide an excellent opportunity to reflect on some investment observations:

  • Stocks are in the middle of a secular bull market, so long-term investors will benefit from staying invested for the long haul.
  • Market timing is not a sustainable investment strategy. The whipsaw nature of the second quarter is a perfect example of the nimbleness required to stay a step ahead of the market.
  • Headline risks are a constant distraction that must be downplayed. Let your long-term objectives and risk tolerance guide your investment decisions, not your emotions.
  • Market corrections, like the one experienced in May, are very normal. Use corrections as opportunities to buy risk assets at lower prices.

Patience is a virtue and successful long-term investors like Warren Buffet choose to view their portfolio in appropriate 5, 10, or 15 year time horizons.  Trust your financial plan.  Trust the markets.  Focus on your long-term goals and do not let tomorrow’s headlines shake your confidence or derail your plan.

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 July 1, 2019 Read More

Recent Federal Reserve Actions

On Wednesday, Federal Reserve officials held interest rates steady.  In the past, a steady rate has generally been regarded as “business as usual”, but the shifting discussion in the direction of future interest rates has created a changing dynamic in the markets.

First, a bit of brief history. In December 2018, the Federal Reserve raised interest rates and indicated there could be further tightening and more rate increases to come in 2019.  With a market already somewhat reeling from trade conflicts and a potentially slowing economy, the market took this news negatively and the markets declined nearly 20%.

Since that time, there has been a softening stance by the Federal Reserve, both in action and commentary.  We have had no interest rate increases since that December meeting, and with the discussions of this most recent meeting, the markets are considering a near certainty of rate cuts in the coming months.  The below chart from the CME group displays the probability of the level of interest rates after the next Fed meeting on July 31, 2019.  One month ago, there was a near 80% probability that rates were going to be left unchanged.  After the meeting yesterday, however, there is now 100% probability of at least a 25-basis point rate cut in the July meeting.

This shift of market perception and commentary from the Fed has had the following effects:

  • Bond markets have rallied as 10-year treasury rates have declined from 2.79% to 2.03%
    • BND, a widely used ETF and proxy for the bond market, is up 5.88% year to date
  • Interest rate sensitive sectors have been strong performers:
    • Real Estate stocks are up 24.16% year to date
    • Utilities stocks are up 15.84% year to date
  • The US Dollar, strong through most of the year, has weakened recently
    • As a result, gold prices have begun to rally, and are now up 5.48% year to date

Lastly, while current yields for US treasuries are low by historical standards, they remain relatively high compared to the rest of the world.  The below chart reflects global bond yields, as of June 18, 2019, for several countries across the globe.  The data reflects that yields are negative for as far out as 30 years in Switzerland, and several other countries have negative bond yields out to 10 years.

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 June 21, 2019 Read More
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