Food for thought: August-September months have been notoriously volatile for the stock market on a historical basis. August has been even more of a headache for investors more recently. Since 1987, the Dow Jones industrial average has posted average losses of -1.1% in August, making it the worst month for equities in the past 30 years. August is also a popular vacation month for Wall Street and therefore any related volatility is usually driven by much more narrow breadth of volume.
-August 17, 2018 Weekly Capital Market Update. Though a topsy-turvy week with Turkey’s currency devaluation and mixed corporate earnings results for the tail end of the season, the S&P 500 eked out a positive finish of +0.66%; however, the Nasdaq lost some ground on the week, -0.29%. The stock market continues to be in a tug-of-war between policy risks vs. strengthening economic and corporate fundamentals. However, from the Macro standpoint, valuation tailwinds remain and these include: 1) 4.1% GDP for 2Q18, 2) 40+ year low unemployment, 3) 20%+ US corporate earnings growth in the 1H18, 4) continued visible benefits from lower corporate taxes, 5) uptick in manufacturing trends and 6) supportive lending environment. Furthermore, the U.S. economy remains the beacon of innovation. Consider that the U.S. gross domestic product was approximately $1 trillion in 1930 and was more than $17 trillion at the end of 2017. That’s growth of 17x. Meanwhile, the U.S. population has grown less than 3x during that time span, to 320 million people from 120 million.
-August 10, 2018 Weekly Capital Market Update. The S&P 500® Index and the Dow Jones Industrial Average lost -0.25% and -0.59%, respectively, on the week. With no corporate headlines materially impacting markets this week and a typical time for summer vacations for market participants, trading activity was the lightest all year. The markets sold off on Friday in reaction to concerns that Turkey could become the next Greek tragedy; the lira declined as much as -20% on Friday. A survey among economists projected a 3.0% GDP rate for 2018, an improvement over surveys conducted last month (+2.9%) and a year ago (+2.4%). Over 90% of the companies in the S&P have reported quarterly earnings; approximately 84% have exceeded earnings estimates.
-August 4, 2018 Weekly Capital Market Update. Sector rotation driven by reversion to the mean where the big gaining sectors of high growth names, are experiencing weight allocation reduction and that money is now moving to other areas of the market. The mainstream U.S. equity market indices edged higher: the S&P 500® Index rose 0.76%, the Dow Jones Industrial Average inched +.05% and the Nasdaq Composite partially recovered with +0.96% (following two weeks of negative returns). Trade, energy, Brexit and earnings reports dominate the news headlines. So far, 80% of the companies in the S&P 500® have reported results and earnings growth is 24% in Q2 2018, which would be the second highest earnings growth since Q3 2010. Also, global economic growth estimates for 2019 has moved up to a very healthy +3.9%. However, trade tensions continue to also dominate the headlines: the U.S. announced an increase, from 10% to 25%, of the potential trade tariffs for Chinese goods; China quickly responded with plans to place tariffs on an additional $60 billion on U.S. goods including oil and natural gas.
Food for thought: August-September months have been notoriously volatile for the stock market on a historical basis. August has been even more of a headache for investors more recently. Since 1987, the Dow Jones industrial average has posted average losses of -1.1% in August, making it the worst month for equities in the past 30 years. August is also a popular vacation month for Wall Street and therefore any related volatility is usually driven by much more narrow breadth of volume.
-July 27, 2018 Weekly Capital Market Update. The major equity indices were mixed for the week with the S&P 500 Index gaining +0.61%, the Nasdaq up +1.06% and the Dow Jones finishing down -1.67%. With 53% of the S&P 500 companies having reported results, we are deep into the second quarter (Q2) earnings season and 73% of $SPX companies have beaten sales estimates to date for Q2 - well above the 5-year average (58%). Also, high expectations by demanding investors were reinforced for technology stocks when their intolerance for shortfalls in earnings and revenue growth caused turmoil for Facebook (losing -20% in one day); FB reported slower growth and narrower profit margins. On the trade front, the European Commission and U.S. agreed to put proposed tariffs on hold in favor of trade negotiations. Also, China and the U.S. remain at an impasse on trade. In vignette, this week showed strong GDP growth (+4.1%), sharp earnings growth (+21.3%) and preliminary steps towards easing trade conflicts which together reassured the markets. However, uncertainties related to geopolitics and the mixed results from the technology sector kept many investors sidelined.
-July 20, 2018 Weekly Capital Market Update. All the major U.S. equity market indices edged slightly upward for the week with the S&P 500 +0.02%, Nasdaq +0.15% and the Dow Jones +0.20%. Moreover, the overall S&P 500 Volatility Index (VIX) continues to smooth with volatility range trading in a tight, lower range of 11.9-13.3. According to FactSet, 77% of S&P 500 ($SPX) companies have beaten sales estimates to date for Q2, above the 5-year average (58%). Furthermore, $SPX is reporting earnings growth of 20.8% in Q2 2018, which would be the second highest earnings growth since Q3 2010. Revenue growth has been 9.0% in Q2 2018; highest revenue growth since Q3 2011. Unfortunately, trade friction continues to overshadow positive economic fundamentals with dominating headlines that perpetuate market pressures. For example, on Friday, President Trump announced his willingness to place tariffs on all $505 billion in Chinese goods imported to the U.S.
-July 13, 2018 Weekly Capital Market Update. The major U.S. equity markets followed up with another round of weekly gains: S&P 500 +1.55%, Dow Jones +2.32% and the Nasdaq +1.79%. Even in the throw of escalating global “quid pro quo” trade tariff actions, investors remain skeptical of an all-out trade war. Indeed, while the U.S. announced an additional $200 billion worth of tariffs on Chinese goods in late August, both the U.S. and China signaled that they were open to resuming trade negotiations. For instance, China is increasingly unlikely to retaliate with additional tariffs since the goods imported from the U.S. for additional tariffs is becoming more finite, thereby mitigating these tariff options for China. That said, China could weaponize its $1.2 trillion in U.S. treasuries as another form of negation. A few banks released 2nd quarter earnings and JP Morgan’s Chairman James Dimon indicated that the U.S. economy is charging ahead on most fronts, and the tariff disputes are “affecting psyches more than economics.”
-July 6, 2018 Weekly Capital Market Update. The S&P 500 gained +0.78%, the Dow Jones returned +0.62% and the Nasdaq finished up +1.10% on the week. This week’s S&P 500 gains represent almost one-third of its total return for the year, while the Dow continues to underperform; the Dow remains in negative territory for the year as companies in this industrial index are expected to disproportionally shoulder more of the fallout from tariffs. Given this escalating global tariff environment we continue to favor technology services and small caps stocks, of which both have relatively low exposure to trade friction. For example, trade continues to dominate the headlines as the U.S. imposed tariffs on $34 billion in Chinese exports; China immediately reciprocated on an equal value of American goods, principally agricultural staples and vehicles. Given the current investment climate, we also remain comfortable with a number of our alternative strategy mutual funds, such as YCG Enhanced (YCGEX, +6.0%) and Janus Henderson US Managed Volatility (JRSTX, +7.4%) - both of which have enhanced returns related to volatility. Next week we have earnings season kicking off with some financial names (WFC, JPM & C), which are expected to have positive releases. Friday’s jobs report showed a larger-than-expected gain of +213,000 jobs in June with unemployment rising from 3.8% to 4%; the workforce grew by +601,000 jobs. However, economic fundamentals continue to be overshadowed by trade war rattling.
-June 29, 2018 Weekly Capital Market Update. The major U.S. indices continued to decline this week as trade and other geopolitical headlines dominated investor sentiment. For the week, the S&P 500® Index fell -1.33%, the Dow Jones Industrial Index’s lost -1.26% and the Nasdaq Composite’s experienced the sharpest decline of -2.37%. Clearly, with the market narrative being dominated by developments in the ongoing trade-negotiations (next week deadline of July 6), any corporate fundamental and economic headlines remain in the backdrop. Also, foreign markets have been breaking down, and lack of positive response to trade negotiations could send markets lower. The strongest predictor of recession is the inversion of the yield curve. While it hasn’t really inverted from the very long end to short, the yield curve is flattening.. Why? One factor is the Fed’s bullish outlook on the economy which is engendering hawkish views on rates. The others are very weak inflation expectations over the long term as well as large demand for even modest long end yields (also, U.S. gov’t buyback of long-end).
-June 25, 2018. We are pleased to announce that this year has brought yet another accolade of recognition with the Wealth & Money Management Award for Best Wealth Management Practice 2018 in Southern California. The official announcement of this recent award included the following: "The 2018 Wealth & Money Management Awards continues to be dedicated to celebrating the hard work, and dedication, of those working in this integral industry from asset managers, financial planners, HNWI services and specialist banking providers to name but a few. Financial management is an arduous and complicated task; therefore, many individuals, business people and families look for support to guide them through the complex process of managing their money. From ensuring tax compliance, to assisting clients through monumental life changes, those working in the wealth management industry often become much more than just advisors, developing strong relationships with clients as they navigate many of life’s challenges together."
-June 22, 2018 Weekly Capital Market Update. The broad US equity market indexes declined on the week amidst ongoing concerns of a global trade war with S&P 500 -0.87%, the Dow Jones -2.03% and the Nasdaq -0.69%. This week’s Trump policy threats were directed at almost $450 billion tariffs on US imports from China (equates to value of total imports in 2017) and 20% levy on EU auto imports. In turn, both regions responded with retaliatory counter-tariff intentions, while China also indicated more hawkish regulations on local operating US companies. With all the smoke of trade wars brewing (no fire yet) it is no wonder why the positive fundamentals in the US economy are being discarded by the capital markets. For example, S&P 500 $SPX is projected to report earnings growth of 19.0% in Q2 2018, which would be the 2nd highest earnings growth since Q1 2011 (graph below). We have written extensively about the economic drag on the global economy (see March 3 Tariff Viewpoint: http://www.mcapitalmgt.com/blog/archives/03-2018). These miscued US policies would have severe ramification on future corporate earnings. Case in point, Materials and Industrials stocks, which could be significantly affected by a global trade war, sharply underperformed on the week. Nonetheless, a “trade war” tipping the global economy into a recession still remains a low probability given world trade has almost tripled since 1996 & the trade war escalation still remains in the threat phase (perhaps simply a negotiation tool by Trump).
-June 15, 2018 Weekly Capital Market Update. Markets were mixed this week as fed policy changes, macroeconomic and geopolitical developments continued to dominate headlines. The Federal Reserve raised interest rate +0.25%, moving the short-term rates to 2.0%; the US central bank also provided hawkish statements about perhaps two more rate hikes ahead in 2018. The S&P 500 closed +0.38%, the Down Jones -0.58% and the Nasdaq +1.46%. Fundamentally, the US is still benefiting from strong economic underpinnings. For example, small business optimism rose to its second highest level in the report’s 45-year history and retail sales surged in May. There was also some big news this week on a dividend darling with the $85 billion AT&T and Time Warner merger winning antitrust approval.
-June 8, 2018 Weekly Capital Market Update. With improved investor sentiment all major U.S. Equity Indexes rallied on the week: S&P 500 +2.76%, the Dow Jones +3.74% and the Nasdaq +2.73%. Indeed, every sector posted gains with the exception of the staid yield play of Utilities. While domestic stock strength has returned, emerging markets continue to be walloped (-4.34% week, -13.38% YTD) due to U.S. interest rates, the rising dollar and continued trade tension. The U.S. Corporate Bond Index also has a negative total return of -3.1% for the year, with the long bond’s total return being a woeful -5.4%. This bond rout is largely related to the expectation of several more rate hikes by the Federal Reserve which theoretically would reward investors to wait to invest in higher yielding securities down the road.
June 1, 2018. Monthly Stock Market Returns & Recap for the Month of May 2018: Though it was a wild ride, all major markets finished positive on the month with the S&P 500 +2.41%, Dow Jones +1.41% and Nasdaq +5.61%. There were several positive underpinnings behind the month's uptick in equities, including: 1) upwardly revised GDP growth to 3%, 2) unemployment dropping to 3.9%, 3) business outlook survey suggesting a pickup in manufacturing sector growth (ISA moved to 58.7), and 4) higher construction spending. Furthermore, corporate capital spending (capex) has increased almost +9% since the presidential election (Q4/16) as a result of pro-business policies and the need to expand capacity. Finally, some of the popular, highly-valued tech leaders recovered during the month which, in turn, boosted the S&P 500 and Nasdaq. Morgan Stanley put out a statement this week calling George Soros’ warning of a financial crisis “ridiculous”. Morgan Stanley CEO James Gorman said while some of Soros’ concerns are warranted, others are not. For instance, Gorman said about Soros’ view of the EU that “I don’t think we are facing an existential threat at all”.
-May 29, 2018 Weekly Capital Market Update. The CBOE Volatility Index (Ticker: VIX) or “Fear Index” spiked 29% today on geopolitical news of escalating concerns over Italy's political party coalitions which, in turn, jittered Italian bank stocks and bonds along with other EU country markets. With most overseas markets closing in the red, our U.S. markets likewise opened and subsequently closed with losses on the day. Emerging market bonds also took it on the chin for the day, while flight to quality drove the US Dollar (USD) and treasuries upward. Leaders of the far-right League and anti-establishment Five Star Movement in Italy failed to form a coalition government over the weekend and these concerns around support for populist parties gaining traction ahead of new elections has resulted in risk-off market sentiment. It is our view that while Italy's economic problems are far more severe than the political issues these are really not new developments - they have been known and priced into the markets. Indeed, Italy has been a sore spot in the EU for years and there have been a number of occasions in the past where fears of Italy splitting from the EU have surfaced – much like Greece. Yet, in the intermediate and longer-term, it has turned about to be ‘much ado about nothing.’
-May 25, 2018 Weekly Capital Market Update. While the third week of May imputed a degree of uncertainty by US policy makers, which in turn led to a mixed performance on the five trade days by US equity markets throughout the week, all major US market indexes nonetheless were able to eke out a positive return: S&P 500 +0.33%, Dow Jones +0.18% and Nasdaq +1.08%. The US stock market was exposed to counterweighing factors of influence with the positive development of Secretary Mnuchin announcing early in the week that the U.S. and China are “putting the trade war on hold,” then later in the week (Wed) where the Commerce Department put a NAFTA tariff bullseye on auto imports by stating that auto imports “threaten to impair the national security.” Then on Thursday, Trump again rattled the capital markets by calling off the peace summit with North Korea due to “tremendous anger and open hostility” on the side of Kim Jong Un. Also on the Macro-front, news surfaced on Friday of prospects for an increase in oil production by OPEC and Russia, which led the best performing S&P 500 sector (energy) to consolidate downward. In short, geopolitical headlines and Trump tweets once again overshadowed the constituent fundamentals of the 500 companies trading on the S&P index. What is becoming more and more evident is the less the President tweets and the less Trump goes off script with the media, the better the chances the underlying stocks in the S&P 500 have to meaningfully benefit from positive economic and corporate fundamental trends.
-May 19, 2018 Weekly Capital Market Update. All U.S. major equity indexes lost ground on the week with the S&P 500 -0.47%, Dow Jones -0.36% and Nasdaq -0.66%. Higher interest rates weighed on market sentiment, particularly in the rate sensitive areas of the market such as real estate, utilities, and telecom – all which lost over -2.5% for the week. Looking at future quarters, analysts currently project earnings growth to continue at double-digit levels through the end of 2018. For example, for Q2 2018, analysts are projecting earnings growth of 18.8% and revenue growth of 8.4%. Further, negative EPS guidance is 57% (51 out of 89), which is well below the 5-year average of 72% (Factset). We expect companies in the S&P 500 with higher global exposure to benefit from the tailwinds of a weaker U.S. dollar and higher global GDP growth. The forward 12-month P/E ratio is 16.4, which is only slightly above the 5-year average of 16.1. Wall Street’s consensus bottom-up target price for the S&P 500 is 3084.39, which is +14% above the closing price of 2713.
-May 11, 2018 Weekly Capital Market Update. All major U.S. equity market indexes rallied on the week with the S&P 500 +2.49%, Dow Jones +2.51% and Nasdaq +2.67%. The markets were uplifted with the easing of inflationary concerns after both the consumer price index (CPI) & producer price index (PPI) came in lower than expected. Markets were also supported by corporate earnings results where almost 80% of the S&P 500 $SPX companies have beaten EPS estimates to date for first quarter. If 78% is the final percentage for the quarter, it would be the highest rate since Factset began tracking this data in 2008. The energy sector has been particularly helpful to the S&P 500 with its continued recovery and this has been a standout supporting constituent of companies for the domestic broad market index. Case in point, since the end of March the S&P Energy sector has gained +14%. Finally, the dollar stabilized while the 10-year treasury was held below 3%. We view the month of May as pivotal since it can be a telling month. For example, since the 1970’s, the full year S&P 500 return has been green 35 out of 36 years that saw the S&P 500 up year-to-date in May. Hence, we are encouraged with volatility (VIX) trending below the normal range of 13-15 coupled with majority of the trade days posted gains for the week.
-May 4, 2018 Weekly Market Update. The week ended on a positive note for stocks marked by fluctuating index prices for the major U.S. equity indexes. However, even after the leading U.S. market indexes rallied strongly on Friday, stocks finished mixed for the week. The S&P 500 lost -0.21%, the Dow Jones down -0.19% and the Nasdaq recovered +1.26% on the week. The April jobs report was broadly positive while the unemployment rate fell to 3.9%, the lowest since December 2000. Further, the Fed inflation gauge for rate increases was adjusted toward greater flexibility with “symmetric 2 percent objective over the medium term.” The term “symmetry” suggests more dovish stance on Fed rate hike actions on the draconian 2% inflation target; hence, if inflation exceeds 2% the Fed may not act as aggressively.
-May 2, 2018 Market Research Note: The capital markets are currently struggling to reconcile two narratives of robust economic growth and fears of increasing (downside) tail risk. There are also end-of cycle worries about growth momentum facing headwinds with higher rates and simmering trade-war undercurrents. Higher inflationary mechanisms have also resurfaced (CPI, commodities, gasoline) and there appears to be bond yield backup where yields rise, prices fall. Recall, the Fed’s March Minutes: “some further firming of the stance of monetary policy as likely to be warranted” and “that it remained appropriate to follow a gradual approach to raising the target range for the federal funds rate.” Finally, investors are also still trying to process that while equity markets are a bit off their past lofty levels, we remain in a low-return environment. Hence, as the risk-free rate moves higher, even in an orderly incremental manner, then fixed income will becomes more of a competitive asset class at some point. As for client portfolios, we will continue to implement changes to reflect all these considerations and discuss the rationale for new recommendations during our client meetings.
-Going forward, we will continue to provide capital market insights but reserve some of our more proprietary recommendations and opinions to the form of exclusive communications with our clients. More specifically, this would pertain to recommended portfolio construction changes based on new developing fundamental, economic, corporate and political considerations.
-April 27, 2018 Weekly Market Update. Major U.S. market equity indexes traded largely flat to slightly down for the week while the economy notched another quarter of growth for the first quarter, growing +2.3% at a quarter-over-quarter annualized rate (beating the 2.0% estimates). The U.S. economy has grown at a healthy +2.9% clip year-over-year. Yet, the S&P 500 showed no traction for the week by ending flat, while the Dow Jones and Nasdaq lost -1.03% and -0.37%, respectively. Not even strong S&P 500 corporate earnings that have exceeded 20% has been a sufficient enough catalyst to reset the bull market trend. This level of earnings growth is a remarkable achievement during a period where many are calling for a bear market. Indeed, these factual positive fundamentals are antithetical to Bloomberg’s call of a bear market based on “People who expect the stock market to fall over the next year now outnumber people who predict the opposite.” So far for the first quarter, 79% of S&P 500 companies have beaten EPS estimates to date. If 79% is the final percentage for the quarter, it will mark the highest percentage since we began tracking this data in 2008. Technology leaders Facebook, Amazon, Alphabet and Microsoft also all reported significant revenue for the week.
-April 25, 2018 Market Research Note. The yield on the 10-year Treasury note, which helps set rates for auto loans, mortgages and other lending, climbed to 3 percent for the first time since 2014. Some strategists have predicted the 3 percent 10-year yield represents the end of the stock market rally, with corporate borrowing costs becoming too punitive and fixed-income looking too appealing. The view is higher rates would be a drag on the economy and therefore a harbinger for both economic woes and stock market upheaval. The corollary to this theory is higher rates are bad for stocks period? To the contrary, since the early '60s we've seen periods of higher rates 23 times and the S&P 500 was higher 19 of those times (Refer chart below). It is also our view we are in a market environment of higher growth and higher interest rates - while these early stage conditions are often supportive to equity valuations - these two factors are also often associated with more market volatility. Again, investors (& their advisors) should take this opportunity to review asset allocations relative to age, goals, and tolerance for risk and volatility.
-April 20, 2018 Weekly Market Update. The U.S. equity market barely nudged through to its second consecutive weekly gain, with the S&P 500 Index ($SPX) rising +0.26% and a +0.45% year-to-date total return. Strong corporate earnings growth of 18.3% for the first quarter helped alleviate the sharp market jitters; also, so far this has been the highest earnings growth since Q1 2011 (19.5%). Further, $SPX is reporting a net profit margin of 11.1% for Q1, the highest net profit margin for the index since FactSet began tracking this data in 2008. Thus far, 85 companies in the $SPX have reported results and of these, about 70% have met or exceeded analysts’ sales estimates and 87% have met or exceeded analysts’ earnings per share (EPS) estimates. Despite slightly higher equity prices, there has been a cautious tone to the market over geopolitical headwinds and domestic political uncertainty. We are hopeful that next week's reported earnings for over 170 companies in the S&P 500 Index will finally establish some positive tailwind based on solid fundamentals. Indeed, company first quarter earnings results for next week include: Verizon, Lockheed Martin, Visa, United Parcel Services, Starbucks, ExxonMobil, Alphabet (parent company of Google), Facebook, Amazon, Microsoft, Intel, among others.
-April 13, 2018 Weekly Market Update. The U.S. equity markets recovered some ground this week with the S&P 500, Dow Jones & Nasdaq returning +2.04%, +1.80% and +2.77%, respectively, on positive trade statements by China, Facebook CEO Zuckerberg’s well-handled congressional testimony and positive corporate earnings developments. Case in point, China’s Xi Jinping showed promising strides in trade while 70% of S&P 500 ($SPX) companies have beaten EPS estimates to date for first quarter - equal to the 5-year average. Additionally, 73% of $SPX companies have beaten sales estimates to date for Q1, well above the 5-year average (57%). [Earnings source: Factset]
-April 7, 2018 Weekly Market Update. It was a wild ride for stock investors this week and I can say from my own experience as a professional investment advisor, the client calls and emails finally spiked during this week. However, given the broad market index (S&P 500) ups and downs – many of which moved into the black and red multiple times on certain days – investors might be surprised to learn that the CBOE Volatility Index (VIX) was not that far out of line with long-term trends. Indeed, the VIX (aka fear index) long-term average is 20, but during this week’s market swings the VIX only really traded between 19-25 - closing at 21.5 for the week. What also might be surprising to investors is that with two of the week's daily loses being greater than -2.0% for the S&P 500 (including Friday), the domestic broad market index only lost -1.3% for the week. Unfortunately, economic and corporate fundamentals were overshadowed by disruptive trade tariff policies [Refer to our March 3, 2018 Trump Tariff Viewpoint]. It is our view that Trump is likely using the new $100 billion of China Tariffs as a negotiation tool, as echoed by his chief economic advisor Kudlow. Regardless, there remains at least another month-and-half before any decision is made either way, including a period of CEO comments and consultation. Another mitigating circumstance is that the US is no longer a manufacturing country with about 80% of GDP tilted toward service industries. Yet, there is still a lot at stake politically with the mid-term House of Representative elections where the Republicans need every vote. Trump can ill-afford a brewing trade war that could cause economic headwinds and continued capital market unrest. Further, it is not lost on Trump that China happens to also hold about $1.17 trillion in American treasuries. Turning back to the equity markets, seven of the eight largest global companies by market capitalization come from the tech sector, and we continue to view their continued outperformance as unsustainable. Hence, other factors beyond trade war rattling is in play here. For example, the FAANGs and other emerging tech stock leaders have their own unique operational challenges that have surfaced and this just happens to be coinciding with macro global trade joisting. On the positive side, we are moving into first quarter earnings and this should be a bright spot for stocks in the news cycle. Another consideration is stock dividends have registered a +9% increase in the first quarter and it is estimated after we close second quarter of 2018, dividend payout would have reach $400 billion, with a large part expected to be reinvested in the market; thus, there is some degree of support mechanism in place.
-April 3, 2018 Market Update. This equity market research note is released before the market open today and futures have been up in the +0.60%-0.80% range. We reiterate that volatility typically extends for several months after the initial market correction (Feb 9th) and there is nothing unusual about this current cycle. The S&P 500 hit correction territory again yesterday when it tested the 2,556 level at 2:40pm EST; it also broke through -3% level loss. However, this consolidation phase of retesting the Feb 9th correction level demonstrated that there remains enough buyer interest at this market support range to drive a partial market recovery from the lows (S&P 500 finished the day at -2.23%). There are competing factors in play including: the market is correcting frothy valuations and is still processing a change to higher economic growth together with higher interest rates. Also, investor feverish sentiment toward stocks like the FAANGs - and other similar new tech like Tesla and Nvidia – had priced values to perfection in market segments that are not immune to challenges. Of course, Trump tariffs and trade war talk has only added more controversy and uncertainty in the equation – two ingredients abhorred by market bulls. From another perspective the market does great when information is being processed about higher company earnings, lower corporate taxes, higher economic GDP and infrastructure investment. Now that the discussion is about trade wars, regulations in social media, higher interest rates impact on the economy, flattening of the yield curve – then, that narrative has imputed caution back into play. We remind investors that timing the market in or out is not a strategy, nor is panicking. Also, while no one knows how long these markets will behave badly, we suggest investors (& their advisors) to use this volatility for buying opportunities and/or rebalancing allocations back in line with the long-term risk/return tolerance targets.
-April 2, 2018 Market Update. At least richly priced and overvalued equities are no longer the banner being waved by market bears as the elevated forward looking price-earnings ratio ("P/E") for the S&P 500 has sharply dropped from above 18x, to 16.1x today. This P/E coincidentally is the same P/E of the five-year average (also 16.1). Additionally, the estimated S&P 500 earnings growth rate for the first quarter 2018 is 17.3% and should this rate materialize, then this would mark the highest earnings growth since Q1 2011 [Source: FactSet]. What has driven the increase in the bottom-up EPS estimate for Q1 2018 and the entire year of 2018? The decrease in the corporate tax rate for 2018 due to the new tax law is clearly a significant factor in the upward revisions to EPS estimates. However, inasmuch as there has yet to be a sign that volatility has abetted history has proved that patient investors are rewarded with the best investment opportunities during bull markets that are afflicted with a market correction.
-April 1, 2018 Market Update. To the chagrin of most U.S. investors their quarterly broker statements will likely show the first loss since 2015 given both equities and bonds lost ground year-to-date. In fact, almost all investment asset classes struggled through a turbulent and volatile quarter in the capital markets. For example, the broad S&P 500 stock index fell -1.2% in the first quarter of 2018, snapping a nine-quarter stretch of gains. And, it wasn’t just domestic equities that took lumps during the quarter, as MSCI Europe also lost -2.0%, US Corporate Bond Index -2.2%, Bloomberg Aggregate Municipal Bond Index -1.1%, U.S. Intermediate Government Bond Index -1.7% and Ishares 3-7 year treasury -2.3%. Even silver and natural gas lost -4.8% and -7.4%, respectively. The most pain however was inflicted to those income-driven investors chasing high yield in master limited partnerships (MLPs) and for those investors that were naïve enough to have high weightings in MLPs probably experienced losses of around -9% for that asset class. Conversely, for those investors exposed to diverse multi asset portfolios - as employed in most of our clients' holdings - the ride should have been less wild and the losses more muted. For example, Pimco All Asset Fund eked out a gain, while certain alternative funds (like CPLSX +1.76%, JRSTX +1.57%, YCGEX +2.01%) all showed gains. Also, the preferred share holdings were largely flat and our largest bond holding of PONAX lost only -0.32%. Most of our individual client stock allocations have high exposure to defensive industries with higher yields and therefore have greater moat protection during volatile periods. For instance, industries like telecom, consumer staples and banks were also in the black so far this year. Going forward, we look for the first quarter earnings to start in this upcoming week of April and we expect positive double-digit growth; this highly visible and measurable source of positive data should help alleviate part of the market jitters associated with February and March (however, it will take a couple weeks before there are enough S&P companies reporting to have a consensus upward trend).
-March 30, 2018 Weekly Market Update. Markets are closed today in observance of Good Friday. It was a volatile week in the capital markets, but Thursday’s strong finish essentially was a day of recovery where all major equity indices moved back to break-even or in the black for the week. However, the S&P 500 Index still lost -2.7% for the month of March, which follows February’s -3.9% pullback; these were the first consecutive monthly declines in the broad equity Index since October 2016. As clarified in the many equity blog comments this week, the market rout originated from the sharp losses by popular (mainstream) technology names like Facebook, Twitter, Amazon, Netflix, Google, etc. However, investors can still find order in disorder by taking a broader perspective. Indeed, it should come to no surprise the hot hand in tech favorites were exposed to some degree of reversion to the mean. For example, since 2015 the Nasdaq has returned 49.1% compared to 28.3% for the S&P 500® Index. On the economic front the IMF released another silver lining by revising up its forecast for 2018 global growth by +0.2% to 3.9%.
-March 29, 2018 Market Update. The U.S. equity markets have been unruly, largely dragged down by Tech darlings like Facebook (FB), Twitter (TWTR), Netflix (NTFX), Alphabet (GOOGL), among other past market leaders – which has rippled into other sectors and retested the market support set with February’s low when the S&P 500 hit 2,581. However, even with the spike in volatility this year the overall stock volatility is not particularly elevated relative to the last 20 years (see chart below). Indeed, recent market action is not “abnormal” over a historical longer-term perspective. The fact is any sharp market movement appears overblown relative to last year, when volatility declined to historically low levels. During these times of uncertainty investors need to have a broader perspective that strong corporate earnings are intact, GDP is growing at a healthy +2.7%, unemployment remains at a historical low and financial institutions remain sound. The synchronized global economies continue to recover while the credit market also remains a source of liquidity; the bond market does not see a major problem looming. Finally, bear markets are almost always associated with recessions. Warren Buffett (the sage of Omaha) has said, “the stock market is a device for transferring money from the impatient to the patient.” At this stage it is important to also remind investors that portfolios should embrace the diverse breadth of the investment universe – having access to an exceptionally diverse pool of investments enhances the potential for both returns and risk diversification.
-March 23, 2018 Weekly Market Update. The equity markets took a dive on the heel of proposed Trump Administration actions that could spur trade wars (new round of $60 billion tariffs on China-based exports), Facebook data breach that rippled through other social media stocks due to new regulatory concerns, a revolving door of top WH official turnover and uncertainty over the Fed Reserve in managing a growth economy with rising rates. More specifically related to the Fed, there is uneasiness in the capital markets over whether the Fed will become hawkish and hit the economic breaks too many times with Fed hikes and how these rate actions may become an albatross on the current 2.7% GDP growth trajectory. With the equity markets yet to find ground after the early February correction, these negative developments rippled through the major U.S. stock indices with the S&P 500 -5.93%, Dow -3.68% and Nasdaq -6.54% for the week. We can't emphasize enough the benefits of a diverse multi-asset portfolio during these periods of market stress. For example, our client portfolio downside correlation to these events remain in the 0.40-0.60 range - and for those more recent clients in which we have had high cash balances due to elevated valuations - we have now been able to find favorable pricing entry points into high conviction, quality securities.
-March 22, 2018 Market Update. While the U.S equity markets continue to show volatility that are not uncharacteristic for a market seeking stability after the correction in early Feb, Trump’s trade war rattling has shown itself to be an ongoing troubling market force. This wall of worry was exacerbated by Trump’s lead personal attorney resigning and reverberations from yesterday’s Facebook data breach. The result of these factors was the S&P 500 -2.52%, Dow -2.93% and Nasdaq -2.43% (YTD the S&P is -0.68%, Dow -2.56% and Nasdaq +3.81%). As advisors, we used this market upheaval period to put some cash to work in high conviction assets deemed overly-punished by widespread capitulation.
-Market 21, 2018 Market Update. The Federal Reserve moved rates +0.25% today to 1.75%, which was in line with expectations. Powell, the Fed Chair, also appeared less hawkish with an indication that the expected three rate increase for the year remains unchanged; though it was indicated that the Fed would remain open to sharper increases should the economy overheat. The Fed also increased the GDP growth rate for the year to 2.7% from 2.4%. The S&P 500 and Dow industrials both slid -0.18%, while the Nasdaq fell 0.26% for the day. The average 30-year fixed-rate is now about 4.5%, up from 4.15% on Jan. 1st and significantly higher than the record low of 3.5% back in December of 2012.
-March 19, 2018 Market Update. Over the past five (5) trading days, the S&P 500 has given back -2.48% and the Nasdaq -3.22%. During periods of volatility it is a great time to reevaluate investor risk aptitude and potentially reallocate investment holdings. However, it is also paramount that investors keep their long-term investment objectives in place and not make emotional decisions. As investment advisors we consider short-term price volatility as an opportunity and high price valuations as risk. We also emphasize that the understanding of risks embedded in a portfolio is central to providing value to our clients. We subscribe to managing dynamic factor exposures while still delivering broadly diversified, economically representative portfolios. We think of investing in terms of probabilities instead of binary outcomes and therefore we apply a selective multi-asset return approach of diversity for risk management. We also continue to educate our clients on investing and think it is important to share valuable historical perspectives on periods characterized by market stress and volatility. For example, from the beginning of the equity market correction decline, of which the -10% was reached back on February 8th of this year, the median return of the S&P 500 Index has been +3.4% after a period of six-months. However, the more telling fact is that 12 months from the beginning of the equity market correction decline the median return of the S&P 500 Index has been +13.3%. Also, these corrections were driven by changes in rates, causing overall market jitters over interest rates. (Refer to Exhibit 2, below)
-March 16, 2018 Weekly Market Update. Equity market volatility remained elevated while U.S. equity indexes lost ground for the week: S&P 500 -1.20%, Dow Jones -1.51% and Nasdaq -1.04%. Placing the ongoing market volatility into perspective, the S&P 500 has moved by more than 1% in nine (9) of the 11 weeks this year, compared with 13 such weeks for the entire year of 2017. The negative market tone was largely driven by ongoing political uncertainty of top WH job shifts including the Secretary of State and Trump’s top economic advisor. Compounding this internal upheaval was a report that surfaced suggesting the WH plans to announce a new round of tariffs aimed at up to $60 billion in annual Chinese imports (e.g., electronics, telecommunications equipment, furniture & toys) in retaliation for intellectual property theft. After Gary Cohn’s resigned from the role WH Chief Economic Advisor last week, President Trump tapped Larry Kudlow as director of the National Economic Council. Mr. Kudlow’s initial economic remarks as the new incoming advisor was a call for “phase two” of tax reform, which would make individual tax cuts permanent and lower the capital gains tax rate.
-Montecito Capital Management Group and its Founder, Kipley J. Lytel, CFA is honored to have again been ranked in the Top 20 Financial Advisors List for 2018, particularly given the depth of 898 peer advisory firms considered. According to Managing Wealth Advisor, Lytel “We continue to be impressed with the rigorous selection process employed by Expertise, which includes a three-step process that scored financial advisors on more than 25 variables across five categories, and analyzed the results to give you a hand-picked list of the best regional financial advisors in California.” Lytel also expressed that “It is rewarding to be recognized for our outstanding investment advisory services by a neutral, third-party advisor ranking entity. Indeed, the five determining factors of Reputation, Credibility, Experience, Availability & Professionalism are a ‘Best of Breed’ hallmark for California-based wealth management practices.”
-This fact about female executives speaks for itself: "Over the past seven years, S&P 500 companies where at least 25% of executives were female generated higher one-year returns on equity than the overall index, on a median basis, according to data compiled by the BofA." Moreover, according to McKinsey study: "Companies in the top quartile for gender diversity were 15% more likely to see their operating income surpass the industry median."
-March 9, 2018 Weekly Market Update. The equity markets traded down most of the week on fears of a trade war, but quickly rebounded on news that steel and aluminum tariffs would exclude imports from Canada and Mexico. The stock market's late week recovery was also aided by strong economic data punctuated by an outstanding employment report, with a whopping 313,000 new jobs reported in February. For the week, the S&P 500 returned +3.59%, the Dow Jones gained +3.34% and the Nasdaq surged +4.17%. On the earnings front, 73% of the S&P 500 ($SPX) companies beat EPS estimates for Q4, a figure that is well above the 5-year average of 69%. Since the US trade deficit continues to expand, it is our view that this provides a good pulse on the health of our U.S. economy where robust domestic demand continues to drive import activity. It’s when the trade deficit shrinks, well, that is when investors should look deeper in the trade numbers to determine if it is slowing demand or currency exchange headwinds.
-Fair trade is challenging with China and that is why a blunt object like a tariff is a crude tool for a complex problem. China is a master manipulator - case in point, as part of the membership into the World Trade Organization (WTO) China was required to reform thousands of laws, yet China failed to deliver the big items like opening telecom mkt, reform state-owned enterprises, halt manipulation of technology standards, etc. Adding salt into the wound is that since China is now part of the WTO they have abused that membership to win regulatory sanctions against US companies like Qualcomm and pushing agendas to force US tech companies to turn over user data and intellectual properties to their gov't. The US Information Technology & Innovation Foundation says our country is not pursuing "constructive confrontation" on these matters, and due to this neglect, US companies are suffering. The upside is China's currency (yuan) is currently free floating now and has surged against the USD which will be hurting their export competitiveness.
-March 3, 2018 Trump Tariff Viewpoint: Going back to 1776 Adam Smith, tariffs have had a disruption effect that hurts the many at the benefit of the few (steel industry). George Bush tried some steel tariffs briefly and while it effectuated a brief industry boost, it still didn’t work out for the steel workers in the long-run. It is not about why can others get away with it. The U.S. is the largest economy in the world and therefore there will be far more significant negative ramifications. The bigger issue is other countries will retaliate with tariffs and this will create both pricing and industry disruption when for the first time in over a decade the entire world is finally growing GDP in tandem (general economic health worldwide). Even China has been moving in the right direction - in 2015 China reduced many import tax rates for clothing, footwear, skincare products, diapers and other consumer goods to boost domestic consumption. The average reduction is more than 50 percent. The odds are that many products will be going higher for our US consumers (steel based-products like autos-airplanes-bikes, blue jeans, even beer!) and Europe has already responded with a proposed tariff against Harley Davidson, Electrolux not making the $250M cooking factory in Tennessee, etc. None of this is good and clearly is at odds with prevailing economic theory, including painful historical lessons going back to the Great Depression (Smoot-Hawley Tariff). Tariffs derail free market competition and this competition enables the consumer to reap the lowest price. Now the price of the good with the tariff has increased, the consumer is forced to either buy less of this good or less of some other good. The price increase can be considered a reduction in consumer income. Since consumers are purchasing less, domestic producers in other industries are selling less, engendering a decline in the economy (if trade ware escalates to other industries). Incidentally, our firm is on record as early as Nov 9, 2016, in a Wealth Management Magazine article where firm founder, Kipley Lytel CFA expressed concern over the potential for Trump protectionist policies engendering a trade war:
-March 2, 2018 Weekly Market Roundup. Volatility returned to the equity markets this week as stocks sold off on announced tariffs on steel (25%) and aluminum imports (10%), raising fears of a trade war. All U.S. equity market indices reported losses for the first week of March with the S&P 500 -1.98%, Dow Jones -2.97% and Nasdaq -1.12%. Meanwhile, the (CBOE VIX) jumped 19% to 19.59; despite the spike in VIX, volatility remains down more than 50% from its intraday peak last month. The capital markets are also still processing the upbeat Fed Chair (Powell) outlook that indicated a possible fourth rate hike this year, up from the three originally planned. It is our view that volatility typically continues for a short period after a market correction (-10%) and history tells us that this is not an uncommon occurrence in long-running bull markets. In fact, a recent Guggenheim study revealed “The majority of declines fall within the 5-10 percent range with an average recovery time of approximately one month, while declines between 10-20 percent have an average recovery period of approximately three months.”
-February 28, 2018 Monthly Market Roundup. February marked the worst month in over two years for the U.S. stock market on the heels of the -3.9% drop in the S&P 500. The month also concluded a 10-percent correction for the stock market; fortunately, strong earnings drove a partial rebound that made the monthly losses less precipitous. The S&P 500 is now down about 5.6 percent from its Jan. 26 record high. However, not only has the stock market correction relieved the market’s extreme overbought and low volatility conditions, the market showed a relatively strong recovery for the month until Fed Chair Powel hinted that the economic environment might justify four rate increases for the year (vs. the previously anticipated 3 rate hikes). Hence, the resurfacing threat of higher inflation and interest rates - which also was largely responsible for the earlier -10% correction - remained a worrisome overhang on the markets. It is our view that the 10-year treasury yield would need to exceed 4.75% before any recessionary impact on stocks (10-yr yield is currently 3.85%). We also foresee continued flattening of the yield curve and higher rates improving the outlook for short versus longer-term bond maturities. The good news: About 76% of the S&P 500 companies that have reported earnings have topped profit estimates - that is above the average 72% average for the past four quarters. Also, for 2018, S&P 500 earnings estimates have increased by $11.21 per share from $146.26 to $157.47. That’s a 7.7% increase. Overall, expectations are that corporate profits will keep rising and the global economy should keep strengthening.
-February 23, 2018 Weekly Market Roundup. The U.S. equity markets ended the week with small positive moves, despite a volatile week of choppy trading. The S&P 500 returned +0.58%, the Dow Jones +0.36% and Nasdaq +1.35% for the week. The volatility overhand remains the concern over inflation and the Federal Open Market Committee (FOMC) policy guidance for 2018 rate increases; the minutes from the January FOMC meeting signaled policymakers’ increased confidence in the growth and inflation outlook. Fed rate increase fears continued weighing on the markets for much of the week as investors speculated that the Fed would raise interest rates three times this year, which is expected to begin from March when the committee members next meet. Mixed signals from the Fed at the end of its policy meeting on Wednesday also led to a surge in yield on the benchmark 10-year Treasury note, which rose to a 4-year high at above 2.95% - there is an inverse relationship between yield and treasure note prices, the latter of which continues to subject treasuries to price weakness. The FOMC silver lining, however, was the Fed report suggested no need for four rate hikes in 2018.
-February 16, 2018 Weekly Market Roundup. The U.S. equity market rebounded from its worst weekly loss in two years as most investors held positions despite a spike in volatility, a rise in Treasury yields, and increasing fears of imminent inflation over the last two weeks. For the week, the S&P 500 rebounded +5.92% as investors have turned their attention from rising inflation to the strong earnings picture. However, all boats were not up with the rising tide, as bonds continue to feel pressure of looming rate increases with the US Core Bond Index -0.41%, US Intermediate Government Bond Index -0.67% and US Short-term Treasuries -0.19% for the week.
-February 8, 2018 Equity Market Update. The S&P 500, which is the US broad equity index, reached its technical correction decline point after the market closed with another -3.75% loss on Thursday. A correction is any market downward move in excess of -10% from its highest peak (Jan 26) and of which the loss hasn’t exceeded -20%. From our calculation, the S&P 500 barely nudged through the -10% mark at its close of 2,581. Again, we assert that a S&P 500 stock market correction is about six-months overdue and we consider the process to be a healthy consolidation cycle. For perspective, it is useful to look at a few of the more recent correction spans: 5/21/15-2/11/16 was -14.2%, 4/29/11-10/3/11 was -19.4%, 4/23/10-7/2/10 was -16.0%. The takeaway is that correction cycles have normal frequencies of about every year-and-half and can extend for months before the secular bull mechanisms resume. The other larger point is that while there are certain inflationary and higher prospective interest rate concerns that have partly been a determining factor for the recent downward volatility in the markets, there are also technical trend cycles in play. As advisors, we remain vigilant in evaluating all factors to determine whether additional defensive strategies should be deployed. At this stage, we are not seeing anything particularly unique about this market correction relative to those of the recent past, all of which subsequently recovered to new highs. We apply a selective multi-asset return approach to diversity for risk management. This approach has minimized market-related loss exposure in our client portfolios. More specifically, the loss exposure to the S&P 500 remains in the 40%-60% range, a span derived from each client’s unique return goals and risk tolerance.
-February 6, 2018. The US equity markets are seeking an equilibrium between buyers and sellers, which has caused the S&P 500 to whipsaw all morning. Markets opened in the red with the S&P 500 falling -2.1% before bouncing back in the green where the equity index was up over 26 points, or about +1%. Then, the broad equity market index preceded to decline toward -1% and has since stabilized at break-even. Conversely, the Nasdaq has been holding relatively strong today. At this juncture, we don't know where the day's S&P 500 market close will end - however, we likely will see the continuation of equity market see-sawing. Volatility surged 106% yesterday and is currently trading at a sharply higher range of mid-40s; the long-term average VIX range should be somewhere between 15-20.
-February 5, 2018. What’s Going on with the Capital Markets? The sell-off in the U.S. stock market that began last week worsened on Monday, as the major indexes wiped out their year-to-date gains. Since hitting a record high on Jan. 26, the S&P 500 Index has fallen 8.5%. Meanwhile, the Dow Jones Industrial Average tumbled more than 1,100 points Monday, its steepest decline since 2011. At this juncture, it is important to remind our clients that we employ diverse multi-asset strategies to help mitigate the risk of material losses. Case in point is that with the S&P 500 down -4% today, our firm’s client portfolio losses have been far more muted with loss correlations being largely 40%-60% (depending on each client’s unique risk tolerance and return goals). To be specific, our client portfolio loss exposure range was 1.6%-to-2.4% at the market close. What we are seeing with this uptick of volatility is typical late-cycle behavior, though more exaggerated because investment assets are more sensitive to interest rate changes during late stage-cycles; also a precursor to the VIX spike was a sharp rise in bond yields. For example, there appear rising signs of inflation and this has spurred expectations that the Federal Reserve may hike interest rates more than anticipated in 2018. Yet, from a fundamental economic standpoint, high employment and strong pricing power isn’t such a bad problem to have. Stocks have been rising pretty much in a straight line since November 2016, and that's not exactly healthy. These are not big declines but rather overdue corrections. Indeed, with the exception of last year’s tiny -2.6% pullback, the S&P 500 hasn’t made it through a year in the past 20 without a temporary drop of at least -5.6%. The point is bull markets usually experience 2-3 pullbacks of -5% a year, along with a -10% correction every year-and-half or so. The larger point is that a market consolidation of a -10% correction is about six-months overdue and has the potential to run a bit deeper than where the S&P 500 trades now. That said, the mood remains overall positive globally on earnings growth and GDP, while tax benefits are expected to elevate corporate profits on the domestic-side in the first-half of 2018. There is also a fair amount of cash on the side, which is in place for opportunistic investments. Final thought is should markets exhibit a secular (long-term) trend of risk-off, we would implement portfolio strategies to mitigate exposure to any severe collapse in equity market values. To be clear, we do not think we are in a bear market but want to remind our clients that we are not complacent advisors that just ‘buy and hold.’
-February 3, 2018 Weekly Market Roundup. The equity market losses for the week were largely driven by Friday’s stock market rout, where the Dow, S&P 500 and Nasdaq composite posted their biggest weekly loss since early 2016; these leading equity indices experienced weekly declines of -4.1%, -3.9% and -3.5%, respectively. The impetus for the weekly losses can be attributed to different early and later week events. For instance, Amazon & Berkshire announced that they are collaborating to enter the healthcare industry, which rattled stocks in that sector early in the week, then on Friday investor jitters were related to: 1) tech darling earnings disappointments (APPL Iphone X, GOOG losses, etc.); 2) signs of inflation with the jobs report (treasury bond yields spiked); and, 3) the GOP memo showing further divisiveness amongst our country’s leadership. The message we would like to send to our clients is that we consider these corrections as healthy consolidations, which are normal market cycle episodes – also, from our calculation, the market is about 5-6 months overdue for its normal correction cycle which typically occurs every year and half.
-Before the Tech Bubble collapsed (In 1999), the economy was in its 8th year of expansion since the previous recession. Back then, job growth was rapid, and inflation fears from an overheating economy were increasing. Fast-forwarding to today, in 2018, the economy is in its 9th year of expansion since the Financial Crisis. Jobs are currently growing today as well, and fears of an overheating economy are similarly increasing. Conversely, in 2018 the economy is in its 9th year of expansion since the Financial Crisis. Jobs are currently growing today as well (along with earnings), and fears of an overheating economy are similarly increasing. (See graph below for relative basis of comparison of historical expansion periods)
-January 27, 2018 Weekly Market Roundup. Broad US equity indices posted their fourth consecutive weekly gain with the S&P 500 returning +2.23%, the Dow Jones gaining +2.09% and the Nasdaq moving +2.31%. The week’s positive equity performance was driven by stronger-than-expected earnings reports, along with a number of companies that expressed positive outlook guidance for 2018. GDP also rose at a steady +2.6% for the fourth quarter, as the markets now look for tax cuts to improve 2018 economic and corporate earnings growth. In turn, investment grade corporate bonds and treasuries remain under pressure by the near-term cloud of at least 2-3 rate hikes for 2018.
-The S&P 500 is up over 6% YTD for January. Since '50, when the S&P 500 has been up >5% or more, the broad equity market index finished in the green 12-out-of-12 times; the average gain was +24.8%. Further, the final 11 months closed higher 11-out-of-12 with '87 being the only year finishing lower.
-Our clients keep asking, "Can these nosebleed high equity valuations last, have these types of elevated price-earnings ratios occurred before with the S&P 500, particularly without some type of market correction (-10% range)?" The answer is "Yes, but with a caveat." First the good news, I turn you to the mid-1990s as an example of a high valuation period when strong earnings growth, which helped keep significant downside events out of the market. More specifically, from December 1991 through December 1994, the S&P 500 Index earnings grew more than 20% annualized. The trailing 12-month P/E began the period at 15.35, climbed above 20 by mid-1991 and stayed above that threshold until the first quarter of 1994. During this same period, the worst peak-to-trough decline in the S&P 500 Index was a drawdown of -8.47% (from February 2, 1994 to April 4, 1994). Putting this historical perspective aside, we still look for greater market volatility in 2018. In fact, a sharp rise in volatility would not necessarily require a deterioration in corporate earnings or economic conditions.
-January 12, 2018 Weekly Market Roundup. The U.S. equity markets posted another week of strong returns as bullish investor sentiment propelled major stock indices to new record highs. The S&P 500 gained +1.64%, the Dow Jones +2.01% and Nasdaq +1.89% for the second week of January. At the same time, US Aggregate Bond Index, Investment Grade Corporates and 1-3 Year Treasury continue to experience price weakness with the overhang of an anticipated 2-3 rate hikes this year. That said, we reiterate our bullish equity outlook for 2018 and though we anticipate increased volatility, we are steadfast in our views of, at least, high single digit positive equity returns.
-In yesterday's Wall Street Journal, "Advisers at Leading Discount Brokers Win Bonuses to Push Higher-Priced Products," conflicts of interest for discount broker advisors were highlighted, such as at Fidelity, TD Waterhouse, etc. According to the article, the discount brokerage in-house advisers often tell clients they don’t get paid on commission and therefore don’t have conflicts of interest. Yet in reality, however, "advisers at some of the biggest brokerage discount brokerage firms make more money if they steer client's toward more-expensive products." We, as independent RIAs, can bridge this conflict since we work in a conflict free environment given we are independent of the discount broker in which we choose have as our custodian. Furthermore, we purposely have chosen to not be licensed to accept any form of commission.
-Our Community Mudslide Devastation, A Personal Note: First, while we have experienced technical and logistical pitfalls from the tragic mudslide & debris events surrounding our community, our health has been unaffected. We also have had workarounds in place to mitigate the cable/wireless/power/telephone disruptions and our system continuity measures have provided for ongoing monitoring and adjustments of client portfolios. However, at times, we had no access to the Santa Barbara office due to the Highway 101 damage and this has necessitated client account maintenance to be handled remotely. We are heartbroken over the horrifying catastrophic destruction and great loss of life in Montecito. Our prayers and condolences continue to go out to those in our community that have experienced hardship and loss.
-The S&P 500 Index has gone 382 days without a 5% pullback, putting it just over two weeks away from the longest streak on record, dating back to 1929. In 2018, our client portfolios will have increased weightings overseas where valuations are over 20% cheaper, growth is intact, central banks remain accommodating and earnings are accelerating. In fact, just a mere 3% of overseas country economies are expected to encounter any form of contraction, which is the fewest foreign countries in recession on record.
-2018 STOCK MARKET FORECAST - S&P 500 EQUITY INDEX PREDICTION: There has been a lot of talk about how the equity markets have been induced by artificial liquidity injections by the Federal Reserve. Insofar as we believe in “don’t fight the Fed,” at the same time it is also the people’s money and institutional money that has been driving this rally, along with benign inflation, relatively low interest rates and strong corporate profit trends. Based on about a dozen 2018 stock market predictions by Wall Street’s strategists the average S&P 500 target is +7.8% return, or a +209 gain to 2,883. Our internal forecasts are also (at least) high single digit returns, however, the forecasts by the top U.S. investment houses came with wide disparity on where stocks are headed. The most bullish year-end price target for the S&P 500 is 3,100, or nearly 16% higher than its current level of 2,674. The least optimistic prediction is 2,750, which represents a gain of about 2.8%. Keep in mind that company stock buybacks are expected to add about +2% to total returns alone this year. Also, following years like 2017 marked by above-average new highs and below-average volatility, volatility has historically picked up in subsequent years to rival the normal average of 50 big-movement days. Wall Street Strategist are also looking for double-digit earnings growth via high profit margins for the S&P 500 in 2018. For example, as of December 22, analysts estimate the earnings growth rate for the S&P 500 for calendar year 2018 to be +11.8%.
-2017 CAPITAL MARKET RETURNS: Equities, Bonds, Hard Assets, Commodities & Currency. 2017 was the second longest bull market in history and the third longest economic recovery, now into its 104th month. Clearly, we are closer to the end than the beginning, so the real question is how far we are from the end. As we enter the New Year and contemplate the opportunities the investment landscape may offer in 2018, it helps to look back at the performance trends of last year. For 2017 the broad U.S. S&P 500 gained +19.4% (w/ dividends 21.8%), the Barclay’s US Aggregate Bond Index returned +3.5%, the US Treasury 10-Yr Index returned +2.4%, gold continued its 2-year winning streak with a +11.3% gain, the Dow Jones Commodity Index returned +4.4% and US crude index was up 4.1% on the year. The stocks that have performed were in a very narrow band for 2017 — mostly social media stocks. Indeed, more than a quarter of the S&P 500’s climb is attributed to just five stocks, known as FAANG — Facebook, Amazon, Apple, Netflix and Google — have dominated the market. The so-called FAANG stocks are fetching prices that would make the Nifty Fifty blush. Their average P/E ratio is a whopping 115, compared with 22.5 for the S&P 500.
December 22, 2017 Weekly Market Roundup. Equities edged higher on the week as investor focus continued to be on the passage of the U.S. tax bill. For the S&P 500, energy shares led the gains, helped by a rise in oil prices. The prospect of an uptick in economic growth and wider deficits pushed the yield on the 10-year Treasury note to its highest level (2.50%) since March. Tax reform has largely been geared toward cutting corporate taxes, and the 2017 Tax Cut and Jobs Act will do just that – the corporate tax rate will fall from 35% to 21%.
-December 15, 2017 Weekly Market Roundup. Stocks were higher for the fourth consecutive week as investors continued to process tax reform traction and increased M&A news. Also, all major equity indices set new record highs as investors remained bullish heading into year-end. The best performing sectors were Telecom and Tech, while Utilities and Materials were the laggards. The Fed hiked rates again this week by +0.25%, from 1.25% to 1.50%. This recent rate increase marks the Fed's third interest rate hike this year and the fifth rate rise of this hiking cycle. The median policymaker “dot” for 2018 suggests three more such rate increases in the year ahead.
-December 8, 2017 Weekly Market Roundup. The S&P rose +0.35% and the Dow Jones rose +0.4% for the week, while the Nasdaq continued to lose ground, slipping -0.1% for the week. 2017's return makes it the third-best year of this bull market and the sixth-best year in the past two decades. The week’s jobs report marked the 86th consecutive month the U.S. economy has experienced positive job growth by adding 228,000 jobs in November; higher than the expected 195,000. Investors also welcomed news that both the Senate and House approved a two-week funding bill, staving off a threatened government shutdown this weekend.
-December has historically been the most bullish month for U.S. stocks since the 1950s by posting gains about 75% of the time with an average return of about +1.6% for the month. This month also has never been a fallen angle with being categorized as the worst performing month for S&P 500 returns in any one year.
-December 1, 2017 Weekly Market Roundup. The U.S. equity market rallied for the second consecutive week with all major U.S. equity indices hitting record highs. The positive market tone was largely driven by optimism surrounding tax reform, increase in oil prices after OPEC extended its curbs on oil output till 2018 and initial jobless claims hit a near 45-year low. Revised third quarter growth (GDP) came in higher at 3.3% annualized, higher than the 3.2% print expected; the highest since the third quarter of 2014. High yield markets were down -1.3% through the middle of November before recovering to return -0.3% for the month. Fed Chair resignation speech offered positive insights: “As I prepare to leave the Board, I am gratified that the financial system is much stronger than a decade ago, better able to withstand future bouts of instability and continue supporting the economic aspirations of American families and businesses.”
-November 24, 2017 Weekly Market Roundup. Breaking a two-week stretch of lower markets, the U.S. equity indexes initiated a partial recovery trend on optimistic retail Holiday sales expectations. Powered by telecom, industrials, and information technology sectors the S&P 500 recovered +0.93%, the Dow Jones moved +0.89% while the Nasdaq gained the most with a +1.57% rebound for the week. The S&P 500 trades for 18 times weighted aggregate earnings estimates for the next 12 months, rising from 16.5 a year ago. The S&P 500 market volatility index (VIX), aka the fear index, was down 2% on Friday and has declined nearly 15% to 9.67 over the week, trading at nearly half its historic average at around 19.
-November 10, 2017 Weekly Market Roundup. The equity markets experienced their first round of losses in eight weeks with the S&P 500 -0.14%, Dow Jones -0.35% and the Nasdaq -0.20%. Investment flows moved into defensive positions of consumer staples stocks, which experienced positive returns for the week. Energy stocks were also up on news of Saudi Arabian officials and members of the royal family arrests, spurring an uptick in energy prices. Now that third quarter earnings had largely played out, focus moved to the disappointing progress of tax reform driven by new delays of its passing with congressional divisiveness on many of the items proposed.
-“While the S&P 500 climbed 2.7 percent since September, the gap between the best and worst performing industry widened to 19 percentage points. It’s the first time since the 2008 financial crisis that such a small move in the index was accompanied by such big industry divergence. Surface calm masked wide divergences in returns during a quarter in which investors have bought companies with the best earnings potential while staying away from those that may be hurt by competition or new policies Also, stocks with the weakest balance sheets fell the most relative to the market since June 2016 as a provision in the tax bill capping the amount of deductible interest expenses at 30 percent of a company’s income. They (Investors also) dumped homebuilders, sending a S&P index tracking the group down almost 3 percent, as the mortgage interest deduction for newly purchased homes is set at $500,000.” (Bloomberg, 11/5/17)
-November 3, 2017 Weekly Market Roundup. The U.S. equity market posted modest gains for the week, which extended their weekly winning streak to eight - S&P 500 returning +0.29, the Dow Jones +0.45% and the Nasdaq finishing +0.94%. So far for the third quarter earnings season, 74% of the S&P 500 companies have beaten EPS estimates for Q3 to date, above the 5-year average of 69%. Jay Powell was appointed as the new Chair of the Federal Reserve and the announcement came with little reaction in the capital markets given Mr. Powell has never voted against Janet Yellen in the past and has served on the Fed Board of Governors since 2012. Also, the Fed kept rates unchanged this month but gave a strong indication of a December hike. October's ISM Non-Manufacturing Survey for October was surprisingly strong at 60.1, the highest reading seen since August 2005. The Unemployment Rate fell to a new 17-year low at 4.0% (when the FDTR stood at 6.50%) while the broader U5 measure declined to 5.0% level, the lowest seen since March 2001.
-October 27, 2017 Weekly Market Roundup. The U.S. equity market posted moderate gains for the week (S&P 500 +0.23%) on relatively healthy corporate earnings results from some of the world’s largest companies. Tech was the clear market leader as Microsoft, Amazon, and Alphabet posted strong quarterly results. The S&P 500’s winning streak has now hit seven weeks of gains, which is the longest streak in three years. With over half of the S&P 500 company stocks having reported earnings for the third quarter, 76% of these companies are reporting actual EPS above estimates compared to the 5-year average. In aggregate, companies are reporting earnings that are 4.7% above the estimates, which is also above the 5-year average (Source: FactSet). During the upcoming week, 135 S&P 500 companies are scheduled to report results for the third quarter. The forward 12-month P/E ratio is 17.9, which is above the 5-year average and the 10-year average.
-October 20, 2017 Weekly Market Roundup. Equities continued to rally for the week on upbeat earnings and news that the Senate approved the tax relief bill as part of a 2018 budget resolution. The S&P 500 moved +0.88%, the Nasdaq eked out +0.35% and the Dow Jones jumped +2.04% for the week. For the roughly 20% of S&P 500 stocks that have reported third quarter earnings, 76% of the companies beat consensus earnings estimate. Moreover, 78% of S&P 500 companies have beaten sales estimates for Q3 to date with 10 of 11 sectors reporting revenue growth for Q3 - above the 5-year average of 55%.
-The relatively accommodative (dovish) monetary policy environment, improved global growth (in particular in the U.S.) & tepid inflation were strong contributing drivers for the capital markets so far for the year. However, the overhanging concern for potential volatility is sustainability of quality earnings growth and the fulfillment of tax reform expectation of lower corporate taxes. We believe earnings will still deliver for the third quarter (so far 81% of companies beating estimates), but a good number of companies will be impacted by one-time hurricane events. We also believe some form of tax reform will take hold, but not until the first quarter of 2018. At this stage in the market rally and with equity indices hitting new highs it is important to have a historical perspective. "Since 1928, there have been 29 times (prior to 2017) that the S&P 500 made a 12-month high in the month of September; in 24 of those cases, the market continued to rise during the fourth quarter. Overall, for all periods (including the five down quarters) following a September high, the market gained +3.7% on average). Moreover, when rising bond prices accompanied the new September high in stocks, the average S&P 500 fourth quarter gain was 5.4%.” (Source: Leuthold Group)
-October 13, 2017 Weekly Market Roundup. We're seeing a continuation of the strength in the market combined with low volatility as the S&P 500 returning +0.17%, the Nasdaq finishing +0.25% and the Dow Jones rising +0.43% for the week. Of the public companies that have reported 3Q17 earnings, 81% of the stocks reported better-than-expected results - most of these companies fall within the financial sector. Looking at the 3-month moving average, the U.S. economy is trending at the lowest number of unemployed people for each job opening on record, at 1.15. Finance ministers & central bankers from the International Monetary Fund and the World Bank had meetings this past week and the capital markets received no unsettling surprises from the gathering of top global economic officials.
-October 6, 2017 Weekly Market Roundup. The large-cap S&P 500 Index notched its eighth consecutive daily gain before falling back a bit on Friday—its longest winning streak since 2013 – reflecting a markedly positive run combined with continued abnormally low volatility. The S&P 500 rose by +1.25%, the Dow Jones jumped +1.70% and the Nasdaq increased +1.45% for the week. The Institute for Supply Management (ISM) reported that factory productivity hit its highest level since 2004 while there were also positive developments in services sectors and auto sales. Rates increased for the week with a rather modest 2-3 basis points across the curve. The Fed Reserve is still expected to increase rates 0.25% at the fourth quarter.
Government Tax Reform, its tentative framework: Collapse tax brackets from seven to three, 12%, 25% and 35% (from 39.6%) and double the standard deduction to $12k for individuals and $24k for married couples and increase the child tax credit. Eliminate the complicated AMT and most itemized deductions with the exception of mortgage interest. Also, the far reaching changes includes the repeal of estate taxes, bringing a big windfall to the wealthy. However, for Californians, with high state & local taxes, the tax overhaul would eliminate state & local tax deductions - a big concern. The small business rate will move to 25% (vs. individual rates) while the corporate (stock) tax rate would drop to 20%, with immediate write-off of the cost of new investments for 5 years. Our view: Bodes well for stocks, but the plan is not as rosy for small businesses which count on itemized write-offs. Also, why lower tax bracket for big corporations vs. small businesses, the latter of which is the life blood of US economic growth? How is the repeal of estate taxes going to help 99% of Americans who are already covered by the preexisting $5.49 million estate tax exemption?
-September 30, 2017 Weekly Market Roundup. All US equity indexes rallied for the week, led by small caps and both the energy and technology sector. The S&P 500 gained +0.72%, the Nasdaq jumped +1.07% and the Dow Jones finished +25%. U.S. small-cap stocks are more sensitive to changes in the domestic tax code and have therefore rebounded on the proposed government tax plan. Meanwhile, energy has been oversold and is also being buoyed by the incremental oil recovery since June. In turn, bonds largely lost ground across the board for the week with Barclay’s US Aggregate Bond index and Barclay’s US Government Bond Index down -0.10% and -0.27%, respectfully.
With regard to the multi-asset returns through mid-week, see the follow chart below:
-September 15, 2017 Weekly Market Roundup. The S&P 500 and the Dow finished at record highs with the S&P advancing +1.6% and the Dow rising +2.2%; Nasdaq missed its all-time high after climbing +1.4%. Leading the charge was the Energy sector that finished up +3.9% in tandem with rising fuel prices on the heal of disruptions from the recent Hurricanes.
Below are index returns as of the market close for mid-week:
-September 8, 2017 Weekly Market Roundup. Equity markets exhibited weakness during the truncated trading week (holiday) with the S&P 500 slipping -0.58%, the Nasdaq dropping -1.17% and the Dow Jones declining -0.82%. The capital markets have become rattled by hurricanes, legislative surprises and aggravated tensions with North Korea. Another broader concern is the economic impact of several regions in the US being devastated by hurricanes; already, initial claims for unemployment insurance, a leading indicator of economic weakness, increased +53,000 to 298,000 for the week ending September 2, 2017.
-September 1, 2017 Weekly Market Roundup. Equity markets bounced back for the week on several economic upside developments including 2Q GDP revised upward to 3.0% growth, wholesale inventories +0.4%, August employment change +237k (vs. +180k est), personal income +0.4% (vs. 0.3% est) and ISM manufacturing (58.8 vs 56.8 est). Further, the capital markets positively responded to Trump’s tax reform push highlighting simplified tax codes, lower taxes and repatriating offshore corporate cash hoards. For the week, the S&P 500 gained +1.43%, the Dow Jones +0.88% and the Nasdaq ended +2.71%.
-If history is any guide, September might be a tough market for stocks; it is historically the worst month for equities and the only one with statistically significant negative returns. Stocks have already receded -3% this summer and in our opinion, a bit more correction and consolidation is due.
-August 25, 2017 Weekly Market Roundup. The markets bounced back after three weeks of losses on optimism of tax reform with the S&P 500® Index rising +0.72%, Dow Jones Industrial Average up +0.64% and the NASDAQ gaining +0.79%. The S&P 500 still trades near all-time highs after logging a +9.1% gain year-to-date (total return with dividends +10.96%). Meanwhile, market volatility has been abnormally quiet with the VIX Index dropping to an all-time low of 9.4, well below the 20-year average is 20.7. Central bank policy makers from the world’s leading countries gathered at Jackson Hole, Wyoming, this week where Yellen’s speech was well received by the capital markets as she defended post-crises banking regulations and avoided Fed rate guidance topics.
-Wall Street firms are warning that there are signals indicating the capital markets are overheating, including the decay of long-standing correlations between stocks, bonds and commodities - as well as investors ignoring valuation fundamentals and economic trends. According to firms like HSBC Holdings, Citigroup & Morgan Stanley the global markets are in the last stage of their rallies and there is consensus building that stock and credit markets are at risk of a painful drop. “Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” according to Andrew Sheets, Morgan Stanley’s chief cross-asset strategist. Wall Street research has also noted that for the first time since the mid-2000s, stocks that outperformed analysts’ earnings and sales estimates across 11 sectors received zero reward from investors. Moreover, Citigroup analysts contend that the markets are on the cusp of entering a late-cycle peak before a recession that pushes stocks and bonds into a bear market. HOWEVER, IT IS OUR VIEW THAT WE ARE IN A LATE STAGE CYCLE WITHIN A SECULAR BULL MARKET THAT IS DUE FOR ONLY A CORRECTION, WHICH ARE “NORMAL” PERIODIC PULLBACKS OF 10% (AN OCCURANCE FREQUENCY OF ABOUT EVERY 16-18 MONTHS). WE ARE NOT CALLING FOR A BEAR MARKET!
-August 17, 2017 Weekly Market Roundup. Volatility spiked again and all U.S. equity indexes took it on the chin once again for the week with the S&P 500 -0.55%, Dow Jones -0.77% and Nasdaq -0.64%. The fear index [CBOE Volatility Index, aka VIX] also surged by more than 30% on Thursday as U.S. stocks suffered their worst day in three months. Trading volumes began soaring after Standard & Poor's downgraded the U.S. credit rating and disappointing earnings from Wal-Mart and Cisco Systems. Moreover, the market was also rattled by a gloomy Morgan Stanley report that renewed fears about a slowing global economic recovery; the bank warned that the U.S. and Europe were "hovering dangerously close" to a recession in the next 6-12 months. Finally, the Barcelona terrorist event - a despicable and ghastly act - further unsettled global capital markets.
-August 11, 2017 Weekly Market Roundup. The U.S. Equity Market posted its second worst weekly loss for the year as markets declined on escalating tensions between the U.S. and N. Korea. The S&P 500 lost -1.37% and the Dow Jones returned -1.50% and the breadth was a large swath that included losses in all sectors. For example, the fear index which is often gauged by the CBOE Volatility Index (VIX), which had been at near historical lows, spiked 55% for the week. However, defensive sectors like consumer staples and utilities were essentially flat on the negative side. With respect to bonds, corporates also posted losses whereas flight to safety toward treasuries resulted in positive moves for U.S. government bonds. That said, earnings seasons continues to wrap-up on the positive side: 90%+ of companies in the S&P 500 have reported earnings with 70% meeting or exceeded analysts’ sales estimates while 82% have met or exceeded analysts’ earnings estimates.
-Market volatility has been abnormally low for months (VIX only at 10.5 vs. average of about 14.4) and it is important to be cognizant of historical trends. For example, VIX or volatility often spikes during the August-to-October period. For the last 20 years, August has been the worst month for the Dow Jones & S&P 500. The stock market hasn’t had a downward correction since February 2016, where it sold off 11%. Periodical market corrections typically occur about every 16-18 months, with technical 10% consolidation declines. It is interesting that we also just to happen to be entering that 16-18 month sweet spot within a calendar period for some form of S&P 500 market retrenchment. It is equally helpful to be mindful that there are a number of technical corrections during secular bull markets, and this is considered a heathy pattern. Moreover, bear markets are rare events without being preceded by early recessionary pressures. Indeed, about 75% of company stocks in the S&P 500 have exceed sales and earnings estimates in 2Q17, while the S&P 500 earnings racked +10.1% growth in the most recent quarter. On a macro economic front, unemployment hit a 16-year low and 2Q GDP is at a +2.6% pace.
-August 4, 2017 Weekly Market Roundup. The more diverse sector indexes like the S&P 500 and Dow Jones both were up for the week at +0.23% and +1.22% respectively, while the tech oriented Nasdaq index finished down again, -0.36%. Of the 420 companies in the S&P 500 that have reported earnings to date for Q2 2017 the year-over-year results have been up +10.1%. Moreover, 72.9% of the reported earnings have been above analyst expectations. Additional positive economic drivers also kicked-in for the week as the economy added 209,000 jobs in July, sharply higher than the expected 180,000. Unemployment has now hit a 16-year low of 4.3%.
-July 28, 2017 Weekly Market Roundup. The leading market index indicator, S&P 500, finished flat for the week, while the other two indexes were mixed with the Dow Jones 30 +1.17 and the Nasdaq -0.20%. The best performing S&P 500 sectors were Consumer Staples and Energy, while the top losing sectors were Healthcare and Technology. Consumer confidence rose in July to 121.1 from 117.3 (base rate is 100). Of the 57% of companies that have reported 2nd quarter earnings results, 72.9% have met or exceeded analysts’ sales estimates, while 82.3% have met or exceeded analysts’ earnings per share estimates.
-July 21, 2017 Weekly Market Roundup. Markets were mixed to slightly up this week with the S&P 500 +0.56%, Dow Jones 30 -0.22% and Nasdaq +1.19%. Utilities and Health Care were the best performing sectors, which were largely driven by falling interest rates. In turn, Energy and Industrials dropped for the week. Of the 97 companies in the S&P 500® Index that have reported second quarter earnings results, 71% have exceeded sales estimates and 72% have exceeded earnings estimates. An economic data point to solid growth was housing starts +8.3% in June.
-July 14, 2017 Weekly Market Roundup. The equity markets rallied this week on more dovish comments by Fed Chair Yellen and an optomistic start of earnings season. The S&P 500, Dow 30 & Nasdaq finished the week up +1.42%, +1.04% and +2.58%, respectively. Thus far, 30 companies in the S&P 500 Index have reported results; 87% have met or exceeded analysts’ earnings expectations.
-July 7, 2017 Weekly Market Roundup. Domestic equity market indexes slightly improved during the week with the S&P 500, Nasdaq & Dow up +0.14%, +0.21% and +0.38%, respectively. However, bonds lost ground during this period with the US Core Bond Index losing -0.36%, while the US Government Bond Index lost -0.44%. As we move further in the second half of the year it looks more likely that the global central banks are poised to raise interest rates or otherwise tighten monetary policy as economies improve. Historically, rising rate cycles correspond with improving economic conditions and last a span of about two-to-four years. However, gradual incremental rate cycles are often accompanied by a continuation of a bull market. For example, the current cycle began in December 2015 when the Fed Funds rate rose from 0.25% to 0.5%, so based on this theory we would potentially remain in a midst of the bull market. In the U.S., the ISM Manufacturing Index for June reached its highest level since August 2014.
Below is a mixed index summary of returns for the year and month-to-date:
-July 1, 2017 Weekly Market Roundup. For the first half of the year, the S&P index rose +8.2% while the Dow ended the first half of the year +8% higher. Meanwhile, the Nasdaq still delivered the best index performance of +14.1% even after sharp sell offs for most the week. Overall the three equity indexes had the best performance for this period since 2013. Overall, companies in the S&P 500® Index are expected to grow sales by 4.7% and earnings per share by 6.5% The final estimate for first quarter GDP was increased to +1.4%, driven by a higher estimate for consumer spending.
-June 18, 2017 Weekly Market Roundup. The U.S. Equity Market finished mixed for the week with the S&P 500 holding its ground at +0.1% while the Nasdaq continued its slide with -0.92% loss. Driving most of the market's action was the Fed’s +0.25% rate increase and its comments, along with several other important economic data reports. The Federal Reserve laid out its plans to reduce the size of its $4.5 trillion balance sheet.
-June 9, 2017 Weekly Market Roundup. The equity indexes closed mixed for the week with the S&P 500 –0.27%, the Dow Jones 30 +0.33% and the Nasdaq -1.55%. However, Wall Street's tech darlings took it the shorts on Friday with the FAANGs having sharp losses: Facebook (FB) -3.3%, Amazon (AMZN) -3.2%, Apple (AAPL) -3.9%, Netflix (NFLX) -4.7% and Google (GOOG) -3.4%. These five stocks have accounted for a remarkable two-fifths (or 40%) of the S&P 500’s market gain this year. Much of the tech sell-off was driven by jitters over rumors that Apple’s iPhones may have reduced speeds due to modem supply constraints, along with Goldman Sach’s research piece on the tech stock leaders called the FAAMG (includes Microsoft); the piece highlighted how the FAAMGs are behind in profitability relative to the overall tech sector and how these top five names are reminiscent of the 2000 tech bubble. On the global front, the World Bank released their forecast that the global economy is expected to expand by 2.7% in 2017 and 2.9% in 2018 with anticipated improvement of manufacturing, trade and consumer data.
-June 2, 2017 Weekly Market Roundup. The major U.S. indices advanced to new record highs with the S&P 500 closing the week up +1.0%, the Dow 30 +0.69% and the Nasdaq +1.54%. The continued positive market momentum even overcame a lackluster jobs report of weaker than expected non-farm payrolls, 138,000 reported vs 185,000 expected. Technology stocks (particularly Telecom) led gainers, while financials and energy were the sector lagers for the week.
-Only about half of Americans are participating in the US & International Equity Bull Market. Further, the number of Americans holding stocks have actually declined from before the 2008 financial crises, from 62% to 54% today. Surprisingly, the number of middle aged respondents in the 30-49 age range (& more risk tolerant than retirees) that invested in equities also declined from 71% to 62%.
-May 26, 2017 Weekly Market Roundup. Equity markets rebounded with the S&P 500 rising +1.47% and the Nasdaq returning +2.08%. The first quarter GDP growth estimate increased to 1.2%, from the initial 0.7% on improved consumer spending & business equipment purchases. Moreover, the preliminary reading for the Purchasing Manager’s Index of manufacturing and services activity rose from 52.7 in April to a better-than-expected 53.9 in May (anything above 50 indicate expansion).
-May 19, 2017 Weekly Market Roundup. The equity markets were shaken mid-week by President Trump’s political stumbles and the recent appointment of an independent special prosecutor to investigate the alleged Russia connection. However, the markets continued to show resilience on Thursday and Friday with positive gains. In the end, for the week the S&P 500 & Dow 30 both returned -0.32%, while the Nasdaq lost -0.61%. Much the recovery from early market losses were driven by positive economic indicators, such as low jobless claims and industrial production. During this period market volatility – which has been abnormally low for many months – spiked upward by over 30% ending the week at still heightened levels for the week at 12.04.
-The apparent never-ending miscues and political follies by POTUS and the WH finally shook Wall Street today, Wednesday 17th. However, there was no fundamental basis to justify the equity sell-off other than Trump’s credibility to pursue his agenda being further eroded. For example, corporate earnings, prospective GDP growth, employment and consumer sentiment all remain relatively supportive. Nonetheless, the markets drowned in red today and wiped out the entire month’s gains. The leading index returns for the day were as follows: S&P 500 -1.83%, Dow 30 -1.78% and Nasdaq -2.57%.
-Equity market volatility as measured by VIX is also commonly referred to by Wall Street as the “Fear Gauge". Last week the VIX market volatility gauge hit a 23-year low of 11.18. There is apparently little evidence that periods of low volatility have any correlation with future poor returns. In fact, a low VIX is just like high stock multiples—all they show is that investors have an optimistic view of the future.
-May 13, 2017 Weekly Market Roundup. Stocks marked the longest weekly losing streak in four months amid unimpressive financial results from large retailers and the continued White House controversy, which added another distraction to potential tax reform initiatives. Earnings season for the S&P 500 companies are largely over with more than 90% of companies in the S&P 500® Index showed an average 14.4% increase in earnings and an 8.7% increase in sales. Turning internationally, in Germany there was positive preliminary expansive GDP data for 1Q of +1.7% year-over-year, along with improved EU stability with France’s Emmanuel Macron Presidency.
-May 5, 2017 Weekly Market Roundup. For the week, the S&P 500 added +0.6% buoyed by solid jobs reports, strong corporate earnings and waning geopolitical concerns. Corporate stock earnings continue to show growing strength in the economy. With 83% of the stocks in the S&P 500® Index having reported results, the overall earnings growth rate has increased to 13.5%, up from 12.5% last week and 9.0% at the beginning of the reporting period. Employment and inflation data should support further Federal Reserve rate increases this year; the next hike may occur as early as June. Meanwhile, continued pressure on oil prices weighed on the energy sector with the influx of production from Libya, threatening to add to already high inventory levels of global crude.
-May 4, 2017 Market Update. The US equity markets remains range bound and it is now just over two months since the SPX nudged its head just above the 2,400 level. Technology has been the clear sector winner this year, up +16.3% followed by Healthcare which has rallied on hopes of Obamacare repeal. Conversely, the energy sector is down -10.3% this year, while consumer services and real estate have been narrowly trading in the +1% range.
Year-to-date & April month-end index category returns:
-April 28, 2017 Weekly Market Roundup. The S&P 500 finished with a gain of 1.5%. Some good first-quarter earnings results also boosted the indexes and helped the market carry momentum, boosted by positive reaction to earnings reports from Amazon (AMZN) & Alphabet (GOOGL). The VIX (CBOE Volatility Index), often called the “fear gauge,” dropped 26% after the French vote, the largest one-day decline since 2011. Investment-grade corporate bonds benefited from positive investor sentiment at the beginning of the week in part due to the French election results. The upbeat sentiment also led to an increase in rate-hike expectations. The fed funds futures market spiked toward an indication of a June FOMC meeting rate-hike announcement with an implied probability of 66.6%, up from last week's 48.5%.
-April 21, 2017 Weekly Market Roundup. Equity markets rallied this week as strong earnings results helped elevate investor confidence. The S&P 500 ended the week up +0.87% and the Dow Jones finished up +0.57%. Thus far, 19% of companies in the S&P 500® Index have reported earnings results; of these, 65% have exceeded analysts’ sales estimates, while 76% have exceeded analysts’ earnings per share (EPS) estimates. Treasury yields remain near 2017 lows as U.S. government debt has continued to rally over geopolitical concerns.
-April 13, 2017 Weekly Market Roundup. Equities retreated for the week as “saber rattling” and geopolitical concerns weighed on investors. Defensive areas of the market, including large cap companies, outperformed while sectors that reflect economic conditions, such as Financials, Materials, and Industrials, lagged. Demand for “safe haven” investments rose, including gold which rose to its highest price since the presidential election, a 14% rally from its December low. Meanwhile, the CBOE Volatility Index jumped about 30% this week on overall greater investor trepidation, its highest point since last November.
-We remain cautious on current client portfolio positions given the escalation of military activities. For example, the U.S. is playing with fire with soon-to-be military exercises off the coast of North Korea, when Kim Jung-on (who is crazy) promises to unleash a "nuclear-tipped missile." We are equally concerned that Syria, Russia, Iran and Hezbollah have aligned against western forces on the Syrian matter. Thus, as to investing right now, we are also not putting more cash to work. In fact, if conflict events escalate & turn south, then we will be pulling some “risk-on” assets into treasuries. However, that would only be a temporary asset allocation shift in event military conflict ensures, as markets typically recover about two weeks after. “In 14 shocks dating (back) to the attack on Pearl Harbor in December 1941, the median one-day decline has been 2.4%. The shocks, which also include the September 11th terror attacks and the 1962 Cuban missile crisis, lasted eight days, with total losses of 7.4%…The market recouped its losses 14 days later.” Chris Isidore, “Impact of War On Stocks and Oil,” CNN Money, 9/3/2013
-According to the index firm MSCI, the performance of high yielding equities when the Fed raised rates offer protection. It turns out that over the 88 years through July 2015, when 10-year rates have been low (less than 3%), high-yielding stocks have outperformed the market by an annualized 2.4% as the Fed tightened.
Two graph charts depict major index performances year-to-date & for month-to-date, respectively:
-April 7, 2017 Weekly Market Roundup. U.S. equities closed flat to modestly lower for the week, with smaller-cap shares trailing large-caps. The launch of missile attacks against Syria boosted oil prices and sparked a shift into defense stocks as well as safe-haven assets like consumer staple stocks. Heading into the earnings period, analysts expect companies in the S&P to report sales growth of 7.1% and earnings per share (EPS) growth of 8.5%. On Friday, the March employment report fell well short of expectations; yet, the unemployment rate declined to 4.5%, the lowest level since 2008.
-March 31, 2017 Weekly Market Roundup. On the prospects for tax reform and rising oil prices, major indexes all bounced back after the previous week’s losses, but the technology-heavy Nasdaq Composite Index was the only one to recoup the entirety of its decline. Small cap stocks, which have lagged year-to-date, led the gains; the outperformance of these more aggressive stocks suggests that investor confidence is regaining momentum. Also, energy stocks performed well at midweek as domestic oil prices climbed back above $50 per barrel on news of a smaller-than-expected increase in inventories. Municipal bonds posted positive returns for the week, outperforming Treasuries, which were roughly flat for the week on mixed economic data.
-March 24, 2017 Weekly Market Roundup. U.S. Equity market posted its worst weekly loss of the year after snapping a streak of 109 days without a 1% decline on Tuesday as the focus on health care reform weighed on investor sentiment. Investor skepticism surfaced over the potential failure to pass a new healthcare package and how this could potentially delay pro-growth initiatives, most importantly tax reform and an infrastructure package. Greece Woes, Again - another year, another Greek bailout scare. Like clockwork, Greece missed yet another deadline for unlocking bailout funds this week, which brings it closer to re-entering the “Greek debt crisis” saga we nearly saw in 2015.
-March 17, 2017 Weekly Market Roundup. Stocks rose +0.2% for the week to +6.2% for the year, but did not overtake its record high from the start of March this week following the Federal Reserve announcement on Wednesday to increase interest rates for a second time in three months. This is the Fed's third rate increase in the current expansion.
-The Fed moved rates upward by +0.25% today and the S&P 500 index rose in broad participation with the Fed delivering in line with market expectations. According to FOMC Chair Janet Yellen, "I think the trajectory you see as the median in our projections which this year looks to a total of three increases, that certainly qualifies as gradual."
-March 10, 2017 Weekly Market Roundup. The U.S. equity market broke the six-week streak of gains and fell for the first time on uncertainty over upcoming US policy changes, macro concerns surrounding falling oil prices and looming Fed rate hikes. It is important to note that investors have benefitted greatly over the past eight year bull run as the S&P 500 has increased by more than 250% since the market bottom on March 9, 2009.
-Inasmuch as we are pleased our written 2017 market forecast is playing out according to our expectations, and that we recommended +6% allocation increase to equities at the beginning of January, we do not profess to be market Oracles; yet, we are reassured by someone who is: US stock market not in bubble territory, billionaire investor Warren Buffett recently said. In CNBC interview last week, Warren Buffett, the Oracle of Omaha, declared that stocks are “on the cheap side.” He has played the Trump rally by putting another $20 billion into the stock market since Election Day. Stocks are cheap, he said, because interest rates remain very low. Investors would be very sorry they didn't buy stocks if the 10-year Treasury yield were to stay at around the current 2.3 percent for the next decade, Buffett said. "If interest rates were 7 or 8 percent, then these [stock] prices would look exceptionally high." In short, Buffett finds the dynamism of the U.S. economy to be "unbelievable," and said to investors: "You'd be making a terrible mistake if you stay out of a game you think is going to be very over time because you think you can pick a better time to enter."
-March 3, 2017 Weekly Market Roundup. For the week, the S&P 500 benchmark booked a 0.7% gain, its sixth consecutive weekly advance and the Nasdaq returned 0.4%. Large cap companies outperformed smaller cap companies for fourth straight week; the trend suggests elevated investor caution with the indices near all-time highs. Additionally, Consumer confidence has hit a 15 year high at 114.8 while December's retail sales were up 5.6% over the past year, a better-than-expected gain. On Friday, Federal Reserve Chair Janet Yellen signaled a strong likelihood for a rate hike at the Fed meeting on March 15-16: “Further adjustment of the Federal Funds rate would likely be appropriate.”
Asset Class Performance Snapshot: Month-end February 2/24, Quarter-to-date, Year-to-date & One Year Trailing for equities & bonds:
-February 24, 2017 Weekly Market Roundup. U.S. equity markets continued hitting records this week — including 10 day record of closing highs in a row for the Dow Jones as of 23 February. The U.S. equity market climbed modestly higher in a holiday-shortened week. Investors gravitated towards conservative areas of the market, with utilities being the strongest performers followed by consumer staples companies, such as food and beverages. With the fourth quarter earnings season now behind us and a relatively light week of corporate headlines, investors’ were squarely focused on the new Administration’s corporate tax reform. Equity markets remain optimistic that Trump will cut taxes, reduce regulation and implement a sweeping infrastructure spending program. The S&P 500 Index is up +5.3% year to date and has gained over +21% over the past 12 months. The yield on the 10-year US Treasury bond fell -2.9% this week to 2.34%
-February 17, 2017 Weekly Market Roundup. The U.S. Equity Markets surged to new record highs this week on increased investor optimism surrounding the Trump administration’s tax reform, improving economic data, and strong corporate earnings results. The generally positive fourth quarter earnings have provided a greater sense of optimism of improving economic growth in 2017. Day-to-day, the markets tend to respond to the latest pronouncements from Washington DC. In turn, municipals bonds are at the cheapest levels relative to taxable bonds since at least December, with ratios to taxable Treasury bonds making munies look more attractive. Treasuries absorbed stronger economic data and a more hawkish Yellen at the Humphrey-Hawkins testimony to finish the week 10-12 bps lower in yield. March rate hike probabilities ended the week at 40%.
-Below is the summary of potential Trump’s tax reform proposals which appear on the surface to be pro-economic growth, bullish for equities and corporate net profits:
-Two technical factors may lend support to asset valuations and provide a cushion against the slew of event risks looming this year: First, in a recent study, JPMorgan highlighted that there was a decline in equity supply last year & this created support for equity markets. This trend is anticipated to be an accommodating mechanism in 2017 as global equity supply should further shrink with share buybacks, mergers and leveraged buyouts. Second, net supply of new U.S. investment-grade debt could decline by as much as 31 percent to $511 billion in 2017 thanks to a wave of maturing bonds and coupon payments, according to Bank of America Corp’s calculation. In short, altogether there appears to be less equity supply and more cash coming into play which should bode well for lofty equity valuations. Moreover, there is another component - Wall Street firms (such as RBC) expect corporate earnings to “re-accelerate” to 7.8% growth with profitability being fuelled by an improved operating environment for “financials, less –onerous regulations, and energy.”
-February 3, 2017 Weekly Market Roundup. Markets rebounded from early losses to end the week roughly flat with the S&P 500 adding +0.1 percent to 2,297.42 on the week as the Dow Jones Industrial Average lost -0.1 percent to 20,071.46. More than half of S&P 500 companies have reported earnings and profits are beating expectations by an average 3.3 percent, even as revenue figures fall in line with analyst projections. Earnings are up 5.5 percent on average (the first time EPS growth for two consecutive quarters since 2015) with eight of 11 industry groups posting gains. Friday showed the U.S. added 227,000 net new jobs in the month of January. Relative to expectations, top-line job growth surprised to the high side and continued to impress. The 3-month moving average is 183,000—a good sign for economic growth, stocks, and credit.
-A recent study by FinMason found that a whopping 43% of investors do not know what risk tolerance is and 73% of the survey respondents indicated that their advisor never discussed or explained the potential for portfolio losses that could occur with another big market crash. A conversation explaining volatility, particularly downward portfolio moves, and how it can be controlled through asset allocation is the best way to approach the understanding. For example, we show clients that equity declines of -5% or more are quite frequent at three times a year on average, while -10% or more occur about once a year and -15% or more once every two years on average. Bear market events with equity losses exceeding -20% or more are infrequent, occurring every 3.5 years and lasting about a year in duration. Portfolio diversification may help reduce risk, and the lower the correlation between returns from different securities in a portfolio, the greater the diversification benefit. Successful diversification depends upon combining asset classes that are not perfectly correlated.
-Today (2/1/17), the FOMC left its target range unchanged at 0.50%–0.75%, and reiterated that “gradual increases” in the federal funds rate are still planned. There also appears to be a bias of no move for the March meeting. The only new issue mentioned concerned consumer and corporate sentiment, which were noted to "have improved of late". The 10-year Treasury notes are highly sensitive to small changes in interest rate expectations. This can be beneficial when interest rates are declining, but quite the opposite when interest rates are on the rise. After returning +8.0% during the first half of 2016, 10-year U.S. Treasury notes returned -7.5% during the second half of the year as their yields rose by more than 1%.
-January 27th, 2017 Weekly Market Roundup. The S&P 500 finished for a weekly gain of +1.0%, the NASDAQ was up +1.9% during the week and the Dow Jones Industrial Average Index closed above 20,000 for the first time ever this week. As of today (with 34% of the companies in the S&P 500 reporting actual results for Q4 2016), 65% of S&P 500 companies have beat the mean EPS estimate and 52% of S&P 500 companies have beat the mean sales estimate. For Q4 2016, the blended earnings growth rate for the S&P 500 is 4.2%. Also, the CBOE Volatility Index, the so-called “fear gauge,” hit a more than two-year low this week as signs of an improving global economy and expectations for business-friendly policies. The initial estimate of fourth quarter GDP showed the U.S. economy grew at a 1.9% rate, helped by strong consumer spending, a pickup in business investments, and a rebound in home construction. The pace exceeded weaker growth in the first half of 2016 but slowed considerably from third quarter’s 3.5% growth rate. The market probability for a rate hike at next week's Fed meeting hovered at 22%.
-January 20th, 2017 Weekly Market Roundup. Equity markets finished slightly down for the week with the S&P 500 -0.2% decline, the Dow -0.3% and NASDAQ off -0.3%. Over the last month, the day-to-day changes in the S&P 500® Index have stayed within one percentage point while the Dow Jones Industrial Average has stalled just shy of reaching 20,000. Earnings for the fourth quarter kicked off with generally strong results for financial stocks that were the first to report. Of the 63 companies in the S&P 500® Index that have reported fourth quarter earnings results, 46% have exceeded sales estimates and 63% have exceeded earnings per share (EPS) estimates. Overall, analysts expect sales to rise 4.2%, to mark the Index’s fastest growth since the third quarter of 2014.
Total Returns by Asset Class (YTD Jan 20, 2017)
-Lost decade for international equities. Since international markets peaked in 2007 right before a global financial meltdown, Morningstar data show that developed international stocks – as measured by the MSCI EAFE index – had lost a cumulative -6% through last week. At the same time, the MSCI Emerging Markets index had slid -16.6%.
-January 13th, 2017 Weekly Market Roundup. Markets shifted between modest gains and losses this week to close roughly unchanged. The upcoming fourth quarter corporate earnings reports should provide indications of near-term market direction, and more importantly, insight from management teams’ outlooks for the year. For example, a few large financial firms have reported fourth quarter results with favorable revenue & profit trends, including very positive remarks on the business prospects moving forward. Ahead of the reporting season, analysts are projecting the companies within the S&P 500 index to have revenue increases of +4.6%, along with improved earnings (+3.2%). The World Bank said this week it expects the world economy to expand +2.7% this year, on the heels of stabilizing and slightly rising commodity prices and fiscal stimulus in the US.
-The Conference Board’s Consumer Confidence Index climbed to 113.7 (1985=100) - the highest level since August 2001. It moved +4.3 points higher than November’s level, while beating the prior forecast of 109 (according to Bloomberg reports). Further, the Markets: Proportion of consumers expecting higher share prices in 2017 increased to 44.7% in December, the largest since January 2004.
-January 6th, 2017 Weekly Market Roundup. Equity markets welcomed the New Year with gains in all sectors as all major indices advanced. While the Dow fell just short of reaching 20,000, the S&P 500 closed at an all-time high on Friday. Driving much the rally has been the incoming Trump administration’s priorities including tax, health care, and regulatory reform as well as infrastructure spending. Also, helping equities march higher was the December jobs report, which showed that the economy added 156,000 jobs in December and average hourly earnings grew 2.9% over the past year.
Montecito Capital Management Group's 2017 Market Outlook & Forecast:
As we enter 2017 we expect the current economic rebound to continue suggesting GDP growth will likely move toward the 2.7%-3.0% level by the end of the year based on less monetary stimulus, more fiscal stimulus, a reduction in the corporate tax rate and deregulation.
The S&P 500 equity index is currently trading at about a forward 2017 price-earnings ratio of 17x which is a rich value, but not as lofty as the 2000-2001 tech bubble (nor as cheap as 2009). Wall Street currently forecasts a +5.5% gain for the S&P 500 in 2017 (average of 15 firms) and sees the index reaching 2,363 by year end, from its 12/31/16 close of 2,239. We believe the market has the potential for +7.5% in 2017 given more indirect investment currents where lackluster bond downward pricing will likely engender an extended redistribution from bonds to equities. We also believe the S&P 500 returns will be front loaded, where the largest percentage of gains will be in the first half of 2017.
The incoming administration has promised a much more business-friendly atmosphere including lower taxes and less regulation. Trump has control over both houses of Congress. Also, in the years when that has occurred, equiteies have returned an average of +14% per annum. Having Congressional & Executive Branch control is historically rare for a Republican administration. Trump wants to cut the corporate tax rate, and congress is in agreement, making it likely to happen. According to Citi, if the rate was cut to 20%, it would add $12 to their top-down estimate of $130 for 2017 S&P 500 earnings per share (or about +10%,).
2016 Returns By Sector, Shows Clear Sector Winners, Losers & Benchwarmers:
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