-January 26, 2019 Weekly Capital Market Update. Equity markets took a pause for the week and finished largely unchanged with the S&P 500 -0.22% and the Nasdaq +0.11%. Fortunately, the equity markets have exited the correction phase experienced in December 2018 and are now 9% off its all time high. It is our 2019 theme to incrementally reduce equity holding exposure and the first phase was executed on Friday where the broad market traded up +6.5% year-to-date. We will look to continue the de-risking portfolios throughout the year and believe some type of U.S.-China deal would be the next material trigger to ignite another bump upward. Flash manufacturing PMI, an early indicator of manufacturing, rose slightly in December. The Fed signaled that it is considering holding more Treasury securities in its inventory than previously planned, which would maintain supportive liquidity in the economy. CEO comments during earnings calls have largely reaffirmed a healthy economic outlook for U.S. businesses with diverse sector leaders reporting solid results: IBM, Starbucks, Proctor & Gamble, etc. However, the international economic engine continues to show weakness.
-January 17, 2019 Weekly Capital Market Update. The U.S. equity market posted another strong week of positive returns on 1st quarter corporate earnings results and improved optimism surrounding a U.S.-China trade deal. The stock market is now out of correction, up 14% since near-term bottom in late December. For the week, the S&P 500 finished +2.9% and the Nasdaq was up +2.7% on the week. The earnings reports from the S&P 500 companies believe that economic conditions remain favorable with no signs of imminent recession. The energy sector and consumer retailer stocks have been the outperformers this past couple weeks. Furthermore, the market has been encouraged by a rate pause by the Fed where interest rates should remain at current levels while the balance sheet is being deleveraged.
-January 11, 2019 Weekly Capital Market Update. This week the Federal Reserve made additional accommodative comments of ‘patience’ in interest rate policies, and with trade negotiations with China showing promising headway, improved investor sentiment drove markets upward: S&P 500 +3.63%, Dow Jones Industrial +2.93% and Nasdaq +2.93%. On the fixed income side, corporate bonds also recovered +0.52% with the BBgBarc US Aggregate Bond Index finishing +0.18% for the week. It appears Wall Street has once again revised their rate increase expectations and, absent increased inflation, interest rates are anticipated to remain at current levels at least through June 2019. Beijing trade negotiations are wrapping up with what has been characterized as a “few good days”; China-US even extended the talks to an unanticipated third day. The markets also embraced the expertise from one of America’s most respected CEOs, JPMorgan’s Jamie Dimon when he stated “the markets may have overreacted” to the whole notion of a possible recession. Dimon further added "My view is that the consumer is in good shape and is continuing to grow, and they have backwinds with jobs and wages going up," and "I think you're going to have decent growth in 2019 in America.. Therefore, sentiment might reverse course at some point in the future." Earnings season begins on Monday and should set the tone for next week’s trading - Citigroup will report and other major banks like JPMorgan will report later in the week. We leave you with the most predictive gauge of recession, yield curve data: the yield curve has yet to show signs of “real” inversion (10-year yields less than 2-year yields), which historically has happened ahead of every recession in the past 40 years. Also, the inversion trigger for a recession is a lengthy timeframe: at least eight months before a recession would surface. BTW, the flattening of the yield curve has occurred many times in history with no meaningful signal on the direction of the economy.
-Key excerpts from our 2019 Market Outlook: Tepid equity sentiment and more reasonable valuations shape our lukewarm 2019 outlook, where we anticipate the S&P 500’s returns to be constrained by mild headwinds: U.S. corporate earnings deceleration, sluggish U.S. growth and potential for 1-2 Fed rate hikes. While we predict a mild economic slowdown, we do not foresee a recession in the U.S. where growth will simply taper. U.S. corporate earnings deceleration and P/E multiple compression is already embedded in the S&P 500 valuations as we enter 2019. We foresee U.S. growth to deceleration from 3.0 to 2.2 percent by year-end. While the central bank has signaled its intention to boost interest rates perhaps two more times in 2019, we see a world where rates could be unchanged or only moved upward by +0.25%. We expect the Fed to react favorability to a modest earnings recession, which is technically two quarters of negative year-over-year growth for S&P 500 EPS. It is particularly important to clarify that earnings deceleration does not translate into the economy being in any real, lasting trouble. We are coming into the year with more reasonable fundamentals with economic growth, though slower, where we believe the capital markets can still be supportive to equity valuations. We also recognize that there will be pockets of economic weakness, such as in housing, construction and recent factory production. Again, we expect continued global growth and moderate inflation over the long-term with similar elevated volatility regime to be present in equities for 2019. Our base projection target for the S&P 500 is 2,650, but with a volatile trading range between 2,350-3,000. Our return forecast for 2019 is +5.7% and this target is partly accommodated by a growth consensus estimate of +7.9% earnings and +5.3% sales for the S&P 500. The forward 12-month P/E ratio for S&P 500 is more reasonable now at 14.2, which is below the 5-year average (16.4) and below the 10-year average (14.6). The takeaway is the recent P/E multiple compression below longer-term averages have left equities values more affordable. We will invest with a little extra caution and keeping our eye on signals for any future trouble brewing, such as widening credit spreads and a flattening yield curves; the latter being an indicator for an economic downturn within 12-to-24 months. As for the credit spreads, we look to the treasury-to-junk bond spread for guidance. For example, in late December of 2018 we saw spreads increase to over 5 points, but this type of spike has also occurred in 2011, 2012 and 2015. In fact, in those past years spreads at times reached as high as the 8.0-point spread range and there was no bear market that followed. The point is that while this is a helpful predictive tool, the credit spread really needs to hit the 8.5-10.0-point risk range for any viable market crash signal. The overall equity allocation, both direct and indirect, will be feathered down for a couple of reasons. First, we have more attractive competing returns from stable fixed income yield than past years - we owe that to the Fed’s rate hikes. Therefore, in this investment climate there is a risk-reward framework where about half of our entire return projection from the equity markets could now be sourced from fixed yield, which would not have exposure to equity-like drawdown risks. We also want to be able to realize profits before the anticipated recessionary forces impact equity markets in late 2019 and early 2020. For this reason, we will be looking to stepwise out of long equity positions and place more of the portfolio in the safety of fixed income, such as municipal bonds, treasuries securities, agency bonds, corporate bonds and CDs.
-As bad as the U.S. stock market ended 2018 with the broad U.S. market S&P 500 index down -4.4%, it still outperformed most major world indexes where MSCI World equity index plummeted -14.1%. It was a roller coaster ride in 2018 with daily price swings that were double the volatility of the unusually placid 2017. And, the losses were not limited to just equities, as the corporate bond index dropped -2.3%, U.S. TIPS -1.27% and the commodity index -10.9%. Therefore, Morningstar’s moderate aggressive target risk index lost -6.74% for the year. The good news is that the stock market is far less expensive on a valuation basis than it was at the start of this year. If we learned one thing in 2018, it's that change is going to bring surprises, and volatility is going to reign supreme for the next couple of years.
-January 17, 2019 Weekly Capital Market Update. The U.S. equity market posted another strong week of positive returns on 1st quarter corporate earnings results and improved optimism surrounding a U.S.-China trade deal. The stock market is now out of correction, up 14% since near-term bottom in late December. For the week, the S&P 500 finished +2.9% and the Nasdaq was up +2.7% on the week. The earnings reports from the S&P 500 companies believe that economic conditions remain favorable with no signs of imminent recession. The energy sector and consumer retailer stocks have been the outperformers this past couple weeks. Furthermore, the market has been encouraged by a rate pause by the Fed where interest rates should remain at current levels while the balance sheet is being deleveraged.
-January 11, 2019 Weekly Capital Market Update. This week the Federal Reserve made additional accommodative comments of ‘patience’ in interest rate policies, and with trade negotiations with China showing promising headway, improved investor sentiment drove markets upward: S&P 500 +3.63%, Dow Jones Industrial +2.93% and Nasdaq +2.93%. On the fixed income side, corporate bonds also recovered +0.52% with the BBgBarc US Aggregate Bond Index finishing +0.18% for the week. It appears Wall Street has once again revised their rate increase expectations and, absent increased inflation, interest rates are anticipated to remain at current levels at least through June 2019. Beijing trade negotiations are wrapping up with what has been characterized as a “few good days”; China-US even extended the talks to an unanticipated third day. The markets also embraced the expertise from one of America’s most respected CEOs, JPMorgan’s Jamie Dimon when he stated “the markets may have overreacted” to the whole notion of a possible recession. Dimon further added "My view is that the consumer is in good shape and is continuing to grow, and they have backwinds with jobs and wages going up," and "I think you're going to have decent growth in 2019 in America.. Therefore, sentiment might reverse course at some point in the future." Earnings season begins on Monday and should set the tone for next week’s trading - Citigroup will report and other major banks like JPMorgan will report later in the week. We leave you with the most predictive gauge of recession, yield curve data: the yield curve has yet to show signs of “real” inversion (10-year yields less than 2-year yields), which historically has happened ahead of every recession in the past 40 years. Also, the inversion trigger for a recession is a lengthy timeframe: at least eight months before a recession would surface. BTW, the flattening of the yield curve has occurred many times in history with no meaningful signal on the direction of the economy.
-Key excerpts from our 2019 Market Outlook: Tepid equity sentiment and more reasonable valuations shape our lukewarm 2019 outlook, where we anticipate the S&P 500’s returns to be constrained by mild headwinds: U.S. corporate earnings deceleration, sluggish U.S. growth and potential for 1-2 Fed rate hikes. While we predict a mild economic slowdown, we do not foresee a recession in the U.S. where growth will simply taper. U.S. corporate earnings deceleration and P/E multiple compression is already embedded in the S&P 500 valuations as we enter 2019. We foresee U.S. growth to deceleration from 3.0 to 2.2 percent by year-end. While the central bank has signaled its intention to boost interest rates perhaps two more times in 2019, we see a world where rates could be unchanged or only moved upward by +0.25%. We expect the Fed to react favorability to a modest earnings recession, which is technically two quarters of negative year-over-year growth for S&P 500 EPS. It is particularly important to clarify that earnings deceleration does not translate into the economy being in any real, lasting trouble. We are coming into the year with more reasonable fundamentals with economic growth, though slower, where we believe the capital markets can still be supportive to equity valuations. We also recognize that there will be pockets of economic weakness, such as in housing, construction and recent factory production. Again, we expect continued global growth and moderate inflation over the long-term with similar elevated volatility regime to be present in equities for 2019. Our base projection target for the S&P 500 is 2,650, but with a volatile trading range between 2,350-3,000. Our return forecast for 2019 is +5.7% and this target is partly accommodated by a growth consensus estimate of +7.9% earnings and +5.3% sales for the S&P 500. The forward 12-month P/E ratio for S&P 500 is more reasonable now at 14.2, which is below the 5-year average (16.4) and below the 10-year average (14.6). The takeaway is the recent P/E multiple compression below longer-term averages have left equities values more affordable. We will invest with a little extra caution and keeping our eye on signals for any future trouble brewing, such as widening credit spreads and a flattening yield curves; the latter being an indicator for an economic downturn within 12-to-24 months. As for the credit spreads, we look to the treasury-to-junk bond spread for guidance. For example, in late December of 2018 we saw spreads increase to over 5 points, but this type of spike has also occurred in 2011, 2012 and 2015. In fact, in those past years spreads at times reached as high as the 8.0-point spread range and there was no bear market that followed. The point is that while this is a helpful predictive tool, the credit spread really needs to hit the 8.5-10.0-point risk range for any viable market crash signal. The overall equity allocation, both direct and indirect, will be feathered down for a couple of reasons. First, we have more attractive competing returns from stable fixed income yield than past years - we owe that to the Fed’s rate hikes. Therefore, in this investment climate there is a risk-reward framework where about half of our entire return projection from the equity markets could now be sourced from fixed yield, which would not have exposure to equity-like drawdown risks. We also want to be able to realize profits before the anticipated recessionary forces impact equity markets in late 2019 and early 2020. For this reason, we will be looking to stepwise out of long equity positions and place more of the portfolio in the safety of fixed income, such as municipal bonds, treasuries securities, agency bonds, corporate bonds and CDs.
-As bad as the U.S. stock market ended 2018 with the broad U.S. market S&P 500 index down -4.4%, it still outperformed most major world indexes where MSCI World equity index plummeted -14.1%. It was a roller coaster ride in 2018 with daily price swings that were double the volatility of the unusually placid 2017. And, the losses were not limited to just equities, as the corporate bond index dropped -2.3%, U.S. TIPS -1.27% and the commodity index -10.9%. Therefore, Morningstar’s moderate aggressive target risk index lost -6.74% for the year. The good news is that the stock market is far less expensive on a valuation basis than it was at the start of this year. If we learned one thing in 2018, it's that change is going to bring surprises, and volatility is going to reign supreme for the next couple of years.