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Weekly Commentary - October 29, 2018

10/29/2018

 
The Markets
 
Why did the stock market fall when the economy is doing well?
 
The answer is that one reflects the past and the other anticipates the future.
 
Last Friday’s advance estimate from the Bureau of Economic Analysis showed the U.S. economy grew 3.5 percent during the third quarter of 2018. Harriet Torry of The Wall Street Journal reported:
 
“The economy powered ahead in the third quarter, driven by robust consumer and government spending, though Friday’s report included warning signs that the business sector faces turbulence that could hold back the expansion in the months ahead.”
 
Third quarter’s economic growth was slower than economic growth during the second quarter and stronger than economic growth during the first quarter of 2018.
 
Economists refer to economic growth as a ‘lagging indicator.’ It is a measure that may help confirm longer-term trends, but offers little information about the future.
 
In contrast, the stock market is a ‘leading indicator.’ It reflects what investors think may happen over the next few weeks or months. The volatility we’ve seen during the past two weeks suggests investors are uncertain about what may be ahead. Many factors are contributing to uncertainty. For instance, investors are concerned:
 
  • The U.S. economy may grow more slowly. Economic growth slowed during the third quarter and investors are uncertain whether the trend will continue through the remainder of 2018 and into 2019.
 
  • Negative earnings guidance from companies. Corporate earnings growth was robust during the third quarter. Through Friday, almost one-half of companies in the Standard and Poor’s 500 Index had reported earnings and their blended earnings growth rate was 22.5 percent, according to FactSet. However, despite strong earnings growth, many companies’ shares lost value. One reason is a fair number of companies have issued negative guidance indicating earnings may be weaker in the future.
 
  • Trade tensions could slow global growth. While trade disputes with Mexico and Canada have been resolved, trade issues between the United States and China remain. Al Root of Barron’s reported:
 
“Now, on third-quarter calls, companies have begun to spell out tariff impacts in greater detail. Calculating the ultimate impact of tariffs isn’t easy or precise. A fair calculation would include not only costs but also changes in demand and the possibility of supply-chain disruptions. The result could be significant. The International Monetary Fund lowered its global growth expectations when it released its recent outlook because of, in part, ‘escalating trade tensions.’
 
  • Federal Reserve rate hikes could slow economic growth too quickly. The Fed has begun raising the Fed funds rates, encouraging interest rates higher, in an effort to keep inflation in check. Some are concerned the Fed may raise rates too quickly or too high and choke economic growth.
 
You have probably heard the saying, “Markets hate uncertainty.” Recent volatility seems to be the result of uncertainty and it is possible uncertainty will cause stock markets to bounce around for some time.
 
When stock markets are volatile and headlines describe the action with words like ‘plunge’ and ‘erase,’ it’s easy to let emotion get the better of you. Before making changes to your portfolio, please give us a call. We can discuss your concerns and any changes you would like to make to your long-term financial plan. 

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Weekly Commentary - October 22, 2018

10/22/2018

 
The Markets
 
The world remains full of opportunities and challenges.
 
Although we’ve seen global markets moving in tandem in recent years, Sara Potter of FactSet pointed out, “…we’re starting to see the end of the synchronized global growth that has prevailed over the last two years. While the U.S. economy remains strong, growth in Europe and Japan is moderating, and emerging markets are under increasing economic and financial market pressure.”
 
Strong economic growth and robust earnings helped U.S. stocks significantly outperform other regions of the world during the third quarter of 2018. In addition, the resolution of some trade tensions, namely the signing of a United States-Korea trade deal and the renegotiation of NAFTA (North American Free Trade Agreement), helped soothe investor concerns, reported Jeffrey Kleintop of Schwab.
 
The trade relationship between the United States and China, however, remains an itchy rash marring the outlook for economic growth in both countries. The Economist Intelligence Unit reported:
 
“Since the start of 2018 trade policy has become the biggest risk to The Economist Intelligence Unit's central forecast for global economic growth. We now expect this risk to materialize in the form of a bilateral trade war between the United States and China, with negative consequences for global growth…The trade war comes at a challenging time for the Chinese economy…The trade war will also affect the U.S. economy…the escalating trade dispute with China will start to weigh on growth later in 2018 and into 2019 – we now expect growth to slow in 2019 to 2.2 percent (2.5 percent previously). The U.S. manufacturing and agricultural sectors, in particular, will be hit by the trade dispute, and rising interest rates will cause private consumption to slow.”
 
China’s economic growth slowed during the third quarter. The nation experienced its slowest growth since 2009, reported Reuters.
 
Chinese stock markets generally lost value. However, some Chinese indices performed better than others, depending on the type of stocks included in the index. For example, the MSCI China Index, which measures large- and mid-cap stocks of various share types that trade on the mainland and in Hong Kong, was down 8.45 percent during the quarter.
 
In contrast, the MSCI Red Chip Index, which is comprised of stocks that are incorporated outside of China, trade on the Hong Kong exchange, and are usually controlled by the state or a province or municipality, was up 3.25 percent for the quarter and flat year-to-date.
 
Emerging markets were weak performers overall during the third quarter, but there were bright spots. Schroders explained, “Turkey was the weakest index market amid a sharp sell-off in the lira…By contrast, Thailand recorded a strong gain and was the best performing index, with energy stocks among the strongest names. Mexico outperformed as the market rallied following general elections and an agreement with the United States on NAFTA renegotiation. Taiwan, where semiconductor stocks supported performance, also outperformed. Despite ongoing risk of new U.S. sanctions, Russian equities also finished ahead of the benchmark, benefiting from crude oil price strength.”
 
Political strife continued to hamper the European Union and the United Kingdom during the third quarter. Overall company profits weren’t particularly impressive in the region and neither was economic growth, reported BlackRock.
 
As the third quarter came to a close, Barron’s conducted its Fall Big Money Poll. Vito Racanelli reported almost two-thirds of professional money managers from across the country said the U.S. stock market was fairly valued – and that was before the market slid lower early in the fourth quarter. While the money managers’ assessment doesn’t mean all U.S. stocks are fairly valued, there may be opportunities to invest in sound companies at attractive prices.
 
Trade tensions, inflation trends, and central bank monetary policy are likely to affect the performance of markets during the remainder of 2018 and into next year.

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Weekly Commentary - October 15, 2018

10/15/2018

 
The Markets
 
Like an unexpected gust of wind that blows the hat off your head or flips your umbrella inside out, last week’s stock market performance startled investors.
 
Looking back, it’s easy to identify some of the factors that may have contributed to investors’ unease and shaken confidence in the markets. Ben Levisohn of Barron’s offered a brief rundown that included:
 
  • The yield on 10-year Treasuries rising to a seven-year high. As interest rates move higher, bonds become more attractive to investors who prefer to take less risk. They move money from stocks into bonds and that can push stock prices lower.
  • Federal Reserve Chairman Jerome Powell suggesting the Fed funds target rate could move higher. Investors worry the Federal Reserve is too hawkish and will raise rates too high, too quickly, causing economic growth to stumble.
  • A speech by Vice President Mike Pence indicating tensions with China may persist. Companies that export to China or manufacture goods in China are at risk if relations between China and the United States don’t improve. Poor relations could affect profits, share values, and economic growth.
  • Earnings reports showing tariffs negatively affecting some companies’ profit margins. FactSet reported, “the term ‘tariff’ has been mentioned during the earnings calls of 12 S&P 500 companies to date, with six of these 12 companies citing a negative impact linked to tariffs.”
  • The International Monetary Fund (IMF) lowering its economic growth projections. Concern about the impact of trade tensions on companies around the world led the IMF to lower some of its economic growth estimates for 2018, especially in Asia and emerging markets.
 
Some analysts believe a desire to take profits also helped fuel the downturn, according to Barron’s Randall W. Forsyth.
 
Whatever combination of events was responsible, the result was markets losing value on Wednesday and Thursday of last week before regaining some lost ground on Friday. Forsyth wrote, “What turned the U.S. markets around Friday – when the Dow and the S&P 500 managed to pop more than 1 percent and the NASDAQ Composite bounced over 2 percent – wasn’t much clearer than what set off the slide. Market Semiotics’ Woody Dorsey says that his proprietary sentiment polling found a bullish reading of absolute zero on Thursday, a contrarian indication that “panic” would be short-lived.”
 
While sharp drops in share values are never comfortable, it’s important to consider the bigger picture. A contributor to Bloomberg Opinion wrote, “This decline follows a market that has tripled since 2009, had zero volatility in 2017…This was the 20th time since the bear market ended in 2009 that the Standard & Poor’s 500 Index had a one-day loss of 3 percent. The NASDAQ-100 Index had its eighth 4 percent down day (although it was the biggest one-day fall since August 2011).”
 
In other words, selloffs are normal and we have experienced them before.
 
So, what should you take away from last week?
 
  1. First, it was a reminder that stocks are volatile investments. They have the potential to deliver higher returns than other asset classes because they require investors to take higher levels of risk.
 
  1. Second, stock market volatility is one reason we allocate assets and build well-diversified portfolios. Holding different asset classes and diverse investments within a portfolio can help reduce the sting of unwelcome surprises like a sharp drop in the value of stocks.
 
  1. Worries about what the future may hold are likely to ruffle investors and we may see additional bouts of market volatility. The current bull market has been running for a long time. Some analysts anticipate recession and a bear market are ahead. As Barron’s reported, neither appears to be here yet:
 
“Other leading indicators, including jobless claims and credit spreads, also held up. ‘I don’t see this all leading to recession,’ says Ed Yardeni, president of Yardeni Research. ‘And, without a recession, I don’t think we get a bear market.’”
 
No matter how intellectually rational these points seem, downturns tend to leave everyone feeling jittery and uncertain. So, take a moment. Think about your portfolio and how it was built to help you achieve your financial goals. Now, ask yourself:
 
  • Have my goals changed? 
    ​
  • Has my risk tolerance changed?
 
If the answer to either of these questions is, ‘Yes,’ call us. We’ll sit down, review your goals and risk tolerance, and make sure your portfolio is structured appropriately.
 
We’re hoping for calmer markets ahead, but we may be in for a bumpy ride. 

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Weekly Commentary - October 8, 2018

10/8/2018

 
​The Markets
 
The stock market tends to be a leading economic indicator.
 
Last week offered some insight to economics and stock market behavior. The U.S. unemployment rate reached its lowest level since 1969 and wages moved higher, yet major U.S. stock indices lost value.
 
Why didn’t stock markets move higher?
 
The answer is stock prices tend to be leading indicators. They reflect investors’ expectations for the future. Last week, investors may have been thinking like this:
 
When unemployment is low, companies cannot always hire enough workers…
To hire more workers, companies raise wages…
Higher wages give workers more spendable income…
More spendable income produces higher demand for goods and services…
Higher demand for goods and services leads to higher prices…
Higher prices (inflation) cause the Federal Reserve to increase the Fed funds rate…
An increase in the Fed funds rate pushes interest rates higher…
Higher interest rates make borrowing more expensive…
Higher borrowing costs may slow business spending…
Slower business spending may cause profits to fall…
Falling profits may cause investors to sell shares…
When investors sell shares, stock prices may drop.
 
In general, “…while it usually takes at least 12 months for any increase or decrease in interest rates to be felt in a widespread economic way, the market's response to a change (or news of a potential change) is often more immediate,” explained Mary Hall on Investopedia.com.
 
At the end of last week, 10-year Treasuries yielded 3.2 percent. Daniel Kruger of The Wall Street Journal reported, “U.S. government bond yields rose to their highest level in years Friday as investors reconsidered the strength of the U.S. economy while selling off stocks that could be hurt by higher borrowing costs.”
 
One way to manage stock market volatility is to have a well-allocated and diversified portfolio.

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Weekly Commentary - October 1, 2018

10/1/2018

 
The Markets
 
It wasn’t headline news…
 
But, if newsprint was still popular, last week’s key economic news would have appeared below the fold.
 
The Federal Reserve raised rates for the third time in 2018, as expected. In addition, the Federal Open Market Committee projects economic growth will continue for three more years, although its median numbers show growth slowing from 3.1 percent in 2018 to 1.8 percent in 2021. (Remember, forecasts, no matter how venerable the source, are best guesses and not bedrock.)
 
Investors weren’t enthusiastic about the Fed’s actions or its expectations, and the onset of United States-China tariffs didn’t lift their spirits. Ben Levisohn of Barron’s explained:
 
“The Dow Jones Industrial Average dropped 285.19 points, or 1.1 percent, to 26,458.31 on the week, while the S&P 500 fell 0.5 percent to 2913.98. Neither could be considered life threatening, and the S&P 500 still rose for a sixth consecutive month. So, while we need something to blame, we needn’t get too worried. Last Monday kicked off with the implementation of tariffs by the United States and China and continued with a Federal Reserve rate hike. Neither was a surprise, though the Fed might have caught a few napping when it removed the word ‘accommodative’ from its statement.”
 
What does it mean when the Federal Reserve removes the word ‘accommodative?’
 
The Fed pursues ‘accommodative’ or ‘easy’ monetary policy when it is encouraging economic growth. Accommodative policy may include lowering interest rates or, in unusual circumstances, quantitative easing.
 
By removing the word, the Fed may be signaling that policy will be ‘tightening’ in an effort to prevent the economy from overheating, reported Sam Fleming of Financial Times. There is debate about whether rates are at a neutral level; one that won’t cause the economy to run too hot or too cold.
 
Let’s hope for a Goldilocks economy. 

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