Market Trades on Trade

April marked another month of heightened stock price volatility as investors tried to negotiate swiftly changing economic and political conditions. It feels like the market is on a high speed treadmill; it exerts maximum effort but remains stationary. The sideways price action with greater volatility has been a good education as investors are being reintroduced to market volatility without serious portfolio consequences. Daily fluctuations in the Dow Jones Industrial Average of 200-500 points became commonplace in April. On the heels of a calendar year which had just eight trading days with a price change of greater than one percent is an awakening. The stock market is on pace to produce 100 daily trading days of greater than one percent in 2018. Buckle up.

Global trade policies and tariff talk took center stage in April. President Trump called for further trade tariffs directed toward China, initially proposing $50 billion in tariffs on Chinese imports then doubling down by disclosing that the administration was considering a further $100 billion. President Xi of China responded in an economic speech opening the door to future discussions. Let the negotiations begin. With so much at stake, expect the world to find a workable middle ground as it relates to free and fair trade.

Beyond the front page trade and tariff headlines, there is a series of important economic stories that will dictate the market’s path for both stocks and bonds. Stocks will be very focused on this new set of quarterly corporate earnings releases. Expectations are high with earnings growth anticipated to be in the 15-20% range. This is an aggressive hurdle where earning shortfalls can punish prices. So far earnings have been very strong, but it appears the stock market already priced this good news into stocks back in the December and January timeframes and is now moving its sights forward to next quarter’s earnings.

Despite the wild ride to start 2018, the stock market offers better relative value today versus the end of January. Price earnings (PE) ratios have come back to earth with prices flat and earnings up. The S&P 500 now trades at 16.1x forward earnings as compared 18.0x at the end of 2017. A 16.1x PE ratio also happens to be the 25-year average, so current valuations are fair given the current environment. There is still some runway left for earnings to grow the remainder of this year and into 2019. At the end of the day, earnings and valuations will drive stock prices.

Stock markets were basically unchanged for the month, with the benchmark S&P 500 advancing 0.38%. The Dow Jones Industrial Average, NASDAQ 100 and the MSCI EAFE finished the month slightly positive while the MSCI Emerging Markets was slightly negative.

The Fed raised the benchmark fed funds rate by a quarter percentage point to the 1.50-1.75% range at their March meeting. The hot debate is whether there will be three or four rate hikes this year. April releases of modest inflation numbers and slower employment growth lead us to believe the final answer will be three Fed rate moves this year. Eyes will now turn to their two day meeting in mid-June.

In the bond market, there were offsetting penalties as interest rates rose and credit spreads declined leaving most indices marginally negative. For the month, the benchmark 10-Year U.S. Treasury yield increased 21 basis points to 2.91% after spending three trading days above the much feared 3.00% level. The yield curve continued to flatten as short-term interest rates moved up higher than long-term interest rates. The 2-Year Treasury rose by 22 basis points to end the month yielding 2.49%, while the 30-Year Treasury rose 14 basis points to yield 3.11%. 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.

It is times like this where you need to trust your financial plan, keep your emotions in check and march onward. Expect market volatility to remain elevated as background noises intensify. The dark clouds affecting the market in the near term will eventually give way to strong corporate earnings and favorable valuations. Stay your course and remain confident.

MARKETS BY THE NUMBERS: 

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 May 9, 2018 Read More

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.

MARKETS BY THE NUMBERS: 

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
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