Concerns Entering 2020

2019 has been a strong year for U.S. equities, with the S&P 500 up over 28% through the middle of December.  As we approach year end, investors will look to position their portfolios and allocations for 2020. After a strong year of performance, it is natural for investors to have some concerns about what the following year will have in store.  A few recurring concerns on the minds of investors entering the New Year are:

  • Slowing U.S. economic growth
  • A historically long equity bull market with extended valuations
  • China/U.S. trade tensions

The U.S. Economy is a hot topic entering 2020 as investor expectations are for a lower GDP growth rate compared to last year.  It is important to note that although the GDP growth is decelerating, it is still growing.  Roughly 68% of GDP comes from consumer spending and with unemployment at 50-year lows, our expectation is for consumers to spend which will continue to drive the U.S. economy.  U.S. GDP growth is forecasted by Morgan Stanley to close out 2019 at 2.3% and decelerate to 1.8% in 2020 and reaccelerate slightly to 1.9% in 2021.  The chart below, from JPMorgan1, displays the continued strength of the U.S. economy going on its 125th month of economic expansion compared to the average expansion of 48 months. 

The strong returns of 2019 and continued length of economic expansion have some investors concerned that the bull market may be coming to an end.  We continually express that time doesn’t kill bull markets but fundamental shifts in the economy and extreme equity valuations will.  The graph below displays the current valuation of the S&P 500 at 17.74x, which is above the 25yr average of 16.24x.  However, continued GDP growth, restrained inflation, low interest rates and moderate earnings growth should provide support for U.S. stocks to trend higher in 2020.2

Additionally, below is a table of the top Wall Street experts and their S&P 500 target estimates for 2020, showing an average implied return of 3.7% as of 12/19/19.3

Lastly, trade discussion between the U.S. and China have seen many head fakes and although it is nearly impossible to know what goes on behind closed doors, the sentiment around the discussions are trending in a positive direction.  On December 13th a Phase 1 agreement was signed requiring structural reforms in China’s trade and economic regime such as technology transfer, agriculture, financial services and intellectual property.

All in all, 2019 was a strong year for the markets and we feel conditions are in place for that trend to continue in 2020. As always, things can change in the investment markets, and we’ll be on alert for potential shifts that may occur throughout the New Year and make adjustments accordingly.

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.

Graphic Sources:

Posted on December 23, 2019 Read More

Record Run

The positive stock market momentum continued throughout the month as economic and earnings news advanced equity prices to multiple all-time record high levels.  As always, some individual companies exceeded earnings expectations and others fell short.  In aggregate, the good news regarding company earnings and economic data outweighed the bad moving stock indices ever higher.  The bond market experienced a sideways month as interest rates initially moved higher and then came back to levels slightly above where the month started.       

The U.S economy is deriving its strength from the consumer and the service sectors while manufacturing sector has been a drag on growth.  The good news here is that most U.S. companies provide services rather than manufacture products.  The Institute for Supply Management’s Purchasing Managers Index for non-manufacturing firms rose nearly two points last month to 54.7 demonstrating service sector strength.  

Retail sales advanced 0.3% in October, according to the Department of Commerce. That surpassed the 0.2% gain forecasted by economists. The consumer is employed and continues to spend.  The economy added 128,000 jobs in October, far surpassing the 85,000 expected.  Unemployment ticked up to 3.6% reflecting more people entering the job market. Existing home sales improved 1.9% last month and year-over-year sales were up 4.6% through October.  Building permits for new homes are at the highest level since 2007 showing further proof of a strong consumer sector.

What a difference a year makes.  One year ago the stock market was in the middle of a painful fourth quarter correction.  After the 13.5% price correction, the Federal Reserve came out in early 2019 verbally changing their plan on monetary policy.  The combination of lower stock prices and a new Fed outlook set the stage for a gangbuster 2019.  The 2019 rally continued in November as the major stock market averages closed the month about 4% higher.  The Dow Jones Industrial Average reached and closed the month above 28,000 for the first time.  International stocks did not keep pace with the rally in U.S. stock markets this month.

The S&P 500 closed at new record highs twelve times over the course of November, 2019.  Stock valuations are typically measured by price-to-earnings (P/E) ratios.  These ratios now show U.S. stocks trading at 18 times forward earnings which are at the upper end of recent ranges.  This means stocks are somewhat expensive on a relative basis.  This may set the stage for a future 5-10% price correction, which if it happens should not surprise investors.  Remember, stocks appreciate over time but they do not go up all the time.  We still believe the U.S. stock market is in the middle of a secular bull market, so maintain a long-term focus.

The bond market settled into a period of interest rate equilibrium.  The Federal Reserve implemented its third and likely final 25 basis point rate cut for this year in late October.  The new targeted fed fund rate of 1.50-1.75% is likely to hold well into 2020 as the Fed closely monitors economic activity.  Any future rate moves by the Federal Reserve will be “data dependent”.  The Fed’s three rate cuts this year have removed the near-term threat of an inverted yield curve.  The slope of the yield curve now has a positive slope and a trading range for rates has been established.  The 10-year U.S. Treasury finished the month yielding 1.78%, up 9 basis points on the month and 16 basis points below the highest monthly close of 1.94% on November 8th. The 2-year and 30-year closed the month yielding 1.62% and 2.21% respectively.        

It has been a great year for investors with all asset classes showing significant year-to-date gains entering the final month of 2019.  At these new record levels, it’s time for investors to seriously think about a strategy for managing portfolio success.  A time tested tool which guides you to buy low and sell high over time is systematic portfolio rebalancing.

Take this opportunity of market strength to rebalance your portfolio back to your targeted risk tolerance.  For example, if three years ago your long-term risk profile targeted your asset allocation to be 60% stocks and 40% bonds. Today, due to market fluctuations let’s assume your portfolio has changed to 72% stocks and 28% bonds.  It’s likely an opportune time to rebalance.  Use this strong market as an opportunity to reduce stocks by 12% and add 12% to bonds, thus returning your portfolio to the original 60/40 allocation target.  Moving forward, set predetermined periods of time or percentages to active your portfolio rebalancing.  This will remove any emotion from the buy/sell decision. 

Rebalancing annually or when your allocation exceeds the target allocation by +/- 10% are both prudent strategies.

The main advantages to regularly rebalancing your portfolio are:

  • Rebalancing stabilizes the risk level of your portfolio over time
  • Creating a non-emotional process for selling the stronger performing asset class and buying the weaker performing one
  • Making the decision to “go to cash” is eliminated, thus keeping your diversified portfolio fully invested over time
  • Rebalancing provides a psychological satisfaction of taking action in a measured way

Systematically rebalancing your investment portfolio is a powerful tool that puts you in the driver seat and keeps the market noise in the back seat.  If you have not implemented a rebalancing program, now is a perfect time to do so.  

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 December 2, 2019 Read More

Earnings Season Once Again

Third quarter earnings season will thankfully return investor focus back to market fundamentals.  Corporate revenues and profits can sometimes get lost in the market noise, but they are the ultimate long-term drivers of stock prices and valuations.  This quarter’s earnings results are especially important as they will set the stage for next year’s expectations and the start of a new decade.

 The recent news cycle has hijacked market attention away from the fundamentals to the breaking news of the hour.  The trade wars and tariffs are a great example.  For almost two years, the ebb and flow of investors’ moods seem to rise and fall with each U.S. and China trade headline.  One day this month, stock prices declined sharply on escalated trade tensions as the White House bans 28 Chinese companies from doing business in the U.S.  Later in the same day, the U.S. issues travel bans on selected Chinese officials.  Three days later we are told of a “very substantial phase one deal” with China.  In the following week, China appears to walk back the idea of a trade deal. Stay tuned.

If U.S. and China trade tensions weren’t enough, let’s add concerns of a global recession, impeachment proceedings, and a string of disappointing initial public offerings (IPOs).  The market has also been focused on the Federal Reserve drama, the potential of an inverted yield curve, Brexit, and the political rhetoric building for the 2020 election.  With so many distractions, it’s easy to lose sight of market fundamentals – earnings and valuations. 

There are just two months left in the year and it has proven to be a terrific year for the financial markets so far.  On a year to date basis through October, the S&P 500 is up 23.2%, the NASDAQ Composite is up 26.0%, and international stocks are measured by EAFE are up 16.9%.  The S&P 500 achieved its fourteenth and fifteenth all-time high this year in October.  Even the U.S. Aggregate Bond Index has gained 8.9% so far this year at a time where most were convinced interest rates were poised to move higher, pushing values lower. 

Overall, the news on third quarter corporate earnings has provided a welcome tailwind to the stock market.  Over 70% of the companies which reported earnings to date have exceeded analyst expectations.  Those companies with positive earnings like Apple, Netflix, Morgan Stanley, J&J, JP Morgan, Pfizer, Tesla, and Merck all saw significant jumps in their share prices.  The companies with disappointing results were punished by the market.  Those included Amazon, IBM, Twitter, Grub Hub, and Beyond Meat.  The net effect for October was market gains across the global indices.  In the U.S., the S&P 500 gained 2.2%, the Dow Jones Industrial Average added 0.6% and the NASDAQ rose by 3.7% in October.  International stocks also rallied as the EAFE and Emerging Markets were up 3.6% and 4.2% respectively.

After a period of free falling interest rates, rates reversed course in October sending yields back to mid-September levels.  However, that level was still well below the mid-January peak in yields this year.  The Federal Reserve delivered on market expectations by lowering the fed funds rate by 25 basis points for the third time this year. The fed funds target now stands at 1.5% – 1.75%.  The Fed sighted a slowing global economy, trade concerns and low inflation as the main points for allowing this third rate cut.  The summer fear of an inverted yield curve is clearly in the rear view mirror as the 2-year U.S. Treasury Note is now yielding 1.52%, which is 17 basis points less than the 10-year U.S. Treasury Note.

News on the economy continues to support the markets.  Third quarter GDP growth in the U.S. economy decelerated much less than anticipated coming in at 1.9% versus the 1.6% expected and the 2.0% growth achieved in the second quarter.  The University of Michigan’s Consumer Sentiment Index rose to 95.5 after spending the prior two months in a range of 89.8 to 93.2.  Strong consumer confidence heading into the all-important holiday season is good news for the economy.  The Department of Labor said that employers added 136,000 net new workers in September. Unemployment was at 3.5%, a level last seen in December 1969. The U-6 jobless rate, which counts both the unemployed and underemployed, fell to a 19-year low of 6.9%. October employment numbers released on November 1, 2019 showed continued strength with 128,000 jobs created and a 3.6% unemployment rate.

On the flip side, the Manufacturing Purchasing Manager Index fell to 47.8 in September, its lowest level in ten years. Investors worried that the number reflected weakening business confidence. ISM’s latest Non-Manufacturing PMI also declined, but the 52.6 reading indicated growth in the service sector last month. Shoppers scaled back their purchases in September. The Census Bureau announced a 0.3% dip for retail sales, the first decrease in seven months.
As 2019 winds down and we set our sights on 2020, it’s important to bring the right mindset with you on this investment journey.  Challenge yourself to evaluate your personal perspective and dare to incorporate the following into your conscience.

  • Separate your political views from your economic views – with the 2020 national election looming, evaluate the economy on economic factors, not political factors
  • Expect the market to advance and decline – the markets are never a smooth ride on a day to day basis, but historically the markets do go up over time
  • Don’t let volatility alter your financial plan – the latest breaking news will have temporary market implications, but don’t let emotions affect your plan
  • View the glass as half full versus half empty – practice long-term trust and optimism and avoid becoming an eternal pessimist
  • Take a long term view – don’t let news of the hour turn your financial plan into a market timing scheme.

Stay your financial course as the future is likely brighter than you give it credit.


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 November 8, 2019 Read More
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