QUARTERLY MARKET UPDATE

Third Quarter Update.

The markets continued their rally through the third quarter with the US indices sitting at or near all-time highs. Historically, September is the worst month of the year, but fortunately the markets weathered the month as volatility remained low and the markets trended higher. 

The trend upward was led by international equities, especially emerging markets. Improving global economic conditions, strong earnings, and a weaker U.S. dollar contributed to much of the international gains. Non-U.S. markets proved to be further ahead economically than expert’s forecasts. Emerging markets outperformed in Q3, up 8%, leading the global stock markets. In October, we could see international stocks hit new all-time highs, the first time since its peak in 2014. We believe this rally in the international markets will continue as Europe and other major economies recover and fuel further global economic growth.

U.S. equities were not as strong as their international counterparts, but still the S&P 500 pushed 4.5% higher in Q3. The S&P 500 has provided eight consecutive quarters of positive gains. We believe strong corporate earnings and positive economic growth are the major contributors to the U.S. rally. Although we foresee brief pullbacks and periods of heightened volatility, especially in specific sectors, we expect positive returns for the next couple of quarters. The domestic markets will continue to drift higher as a result of the tightening labor markets, improving global economy, and potentially, tax reform.

As fundamental economic indicators improve, it solidifies the appreciation of the capital markets. Consumer sentiment remains high as unemployment continues to trend lower and inflation remains low. The recent devastating storms will likely increase spending in Q4, especially in the retail sector as residents and businesses begin to rebuild. Although the hurricanes may negatively impact other sectors of the market, we believe the upcoming earnings season will have a positive impact on the stock market.

Oil has had a rocky year and energy has been the worst performing sector until recently when oil rallied towards the end of the third quarter. The improving international markets are increasing demand and commodity markets are slowly stabilizing the supply and demand balance. Higher commodity prices should be expected for the intermediate-term, causing an increase in global GDP growth - a positive sign for further improvement in global economies.

Although there is concern that the political divide will make it more difficult to pass policy changes, we foresee some type of tax reform to take place this year. In addition, we believe an infrastructure bill remains on the horizon for 2018. We expect that both bills will have a positive impact and stimulate the U.S. economy.

The markets continue to remain resilient through the heightened geopolitical concerns in the third quarter. The problems with North Korea and rhetoric from Kim Jong-un remain a concern, but the markets thus far have felt little impact. In addition, President Trump’s strong communication and impulsive tweets remain an issue and seem to cause further divide in our country. We continue to monitor these issues and the risks associated with these concerns.

As always, please don’t hesitate to reach out to us if you have any questions. 

Quarterly Market Update

Happy 4th of July!  

As the second quarter comes to a close, there are many situations we continue to monitor. Please call us if you have specific questions regarding our investment thesis or questions about your account.

The market held steady in Q2 and added to the positive performance that we experienced in the first quarter of this year. Economic numbers continue to show improvement, but not strongly enough to suggest inflation risk is on the horizon. We believe the Federal Reserve will remain positive on raising rates, but use methodical and conservative measures to determine the timing of those rates.  

Most of the major investment themes from the first quarter persisted through the second quarter. Traditional retail continues to struggle, and Amazon resumes their push for innovation as they announced their intention to purchase Whole Foods Market. There are many reasons why Whole Foods is an attractive acquisition for Amazon, most notably every Whole Foods location can now be used as a distribution channel for Amazon’s products. This is an appealing asset for Amazon as they continue to solve the “last mile” problem for same day delivery and respond to Walmart’s acquisition of Jet.com. Innovation will be the major theme for retail and grocery stores over the next couple of quarters. 

The financial sector had a strong finish in the second quarter. Banks have passed their Fed-mandated stress tests, and are showing strong balance sheets and low debt levels. After a brief pullback mid second quarter, the financial sector looks to resume market leadership in a summer rally. Banks and financial institutions will remain an attractive investment theme into 2018.

Energy and oil companies continue to underperform as OPEC and oil producing countries attempt to create production limits. After the pullback in the first half of the year, energy is an attractive area for new investment dollars.  Oil prices will rise in response to an improving global economic outlook. As energy prices recover, we are targeting high dividend paying equities and oil conglomerates. We believe oil will trade consistently over $52 a barrel by the end of 2017.

Lastly, political news is a source of concern for the markets as the Republican party attempts to find some common ground to work on their political agenda. We continue to watch the newly proposed Health Care Bill. In its current form, we are not optimistic on the passing of the bill. The Republican party seems to be fractured in its support of the President’s agenda, which will likely cause volatility in the markets for the foreseeable future. In addition, President Trump’s approach to international diplomatic concerns raises risk levels in the market. However, we believe some type of tax reform will be accomplished by the end of the year― a positive move for our economy.

We will continue to monitor the markets for opportunities and risks and adjust accordingly. 

Please call us with any questions. We look forward to hearing from you soon.

Quaterly Market Update

First Quarter 2017 Market Update

The market continued its strong post-election rally into the first quarter of 2017. Even though the markets have delivered impressive returns, we believe there are many reasons why the rally will continue through 2017. However, we have some concerns, e.g. the President leading the U.S. into a trade war or continuing to push an isolationist agenda. Overall, we believe the growth in the economy, good employment numbers, and a political platform based on lower regulation and tax reform outweighs the potential risks and will lead the markets higher.

The most compelling argument for further market gain is continual economic growth. The economy started to gain traction and experience sustainable growth approximately 18 months ago. The U.S. is at or near full employment and the workforce is starting to drive wage inflation.  As wage inflation continues, we believe that American consumers will increase their spending. This will drive retail stocks, consumer discretionary companies, and home improvement stores like Home Depot and Lowes, as owners tend to renovate their homes rather than purchase new ones in a rising interest rate environment.   

In addition to an improving economy, the President has outlined a platform of lower regulation and an infrastructure improvement bill.  The lowering of regulation, especially rolling back parts of the Dodd-Frank Bill will help money centers with lending approvals. In addition, we believe the need for infrastructure improvement is large enough that it should be endorsed by both sides of the aisle in Congress. New Infrastructure spending should benefit companies like Caterpillar, Deere, and engineering and supply companies in construction. These industries should continue to grow as spending accelerates.

The Federal Reserve has deferred raising interest rates to normal levels despite improving economic data, partially from concern that foreign economic issues would hamper U.S. economic growth. However, foreign economies look to be in a bottoming process and international “green spots” of growth are emerging. Because of the positive signs in U.S. economic growth and diminished international risk, the Fed has hinted at two potential interest rate hikes this year. High short term interest rates will be very positive developments for financial institutions and banks.

The failure of the Republicans to reach consensus within their own party in the effort to pass health care reform is an interesting development. We believe this could be potentially positive as it is evidence that the checks and balances of our government are working as they should. No majority party should be able to pass laws unhampered by opposing views, whether by other parties or members of its own. This latest impasse could make the many factions in Congress and the Senate work together toward a middle ground -  unless they are resigned to a perpetual standoff. 

Lastly, as we look to April, taxes will be a leading topic throughout the month. The President has indicated that he wants to pursue corporate and personal tax reform. Again, this could help improve economic growth as companies will look to re-patriate foreign earnings at a more competitive global rate than the current corporate tax rate. In addition, if some relief is implemented on personal tax rates, consumers will have more discretionary funds, which will lead to improved corporate earnings. This will not be an easy process nor without negotiations, as our national debt continues to grow to unprecedented levels.  However, if the economy continues to show improvement, the national debt should become more manageable over time, mirroring the accumulated debt burden of the early 1990s that culminated with debt reductions into the late 1990s.

If you have any questions, please don't hesitate to reach out to us. We look forward to hearing from you.

Quarterly Market Update

Closing Out 2016 and Looking Ahead to 2017

The markets rallied for the third quarter in a row to round out a very good year for investors.  The bleak and nervous moments of February 2016 were overcome by optimism in December.  The President-Elect and his perspective on the government is giving investors cautious optimism about 2017.  Several themes generating investor interest are less regulations on corporations- especially banks, major infrastructure investments and a change in the way the government approaches the issues at hand.  The President-Elect looks to solve issues as business problems, thereby creating opportunity for the U.S. people.  This is in contrast to the current administration that seeks to mitigate opportunity issues via more comprehensive social welfare programs.  It seems that the two strategies could not be more different, but each has its own valuable perspective.  This is something that we will continue to monitor and make changes to our investment portfolios as needed.  

One condition that will not change in 2017 is volatility.  We believe volatility will be a major theme in 2017 as the President-Elect chooses to use social media, especially Twitter to communicate quickly and create change.  This is not a well-controlled medium, as the information is instantly disseminated and the intent of the message can be easily lost if not carefully worded or crafted.  Social media can be an effective way to communicate if used properly, but we believe the world has yet to adapt to this changing medium.  And while the world adapts, we are sure volatility will ensue.  Last year, there were three major events causing volatility, the initial pullback that started the year, BREXIT and the Presidential Election.  The S&P 500 Index lost more than 10% in the first six weeks of the year and finished the year up over 9%- a more than 20% move in the index.  We believe there will be more volatility, but the indexes will remain positive for 2017. 

For the first time in almost a decade, the Federal Reserve raised interest rates two times in a year. We believe that the Fed will continue to raise short term interest rates this year and subsequent years. This investment theme will likely be a three to five-year story as the Fed tries to restore short term rates back to normal levels. This is a sign that the economy is growing and economic numbers are continuing to improve.  We believe that the Fed will raise rates another two times this year with the possibility of a third, if the economy continues to improve through the third quarter.

Lastly, employment numbers are inching closer to full employment, with some wage inflation being reported.  This is good news for retailers, especially online and box retailers like Walmart, Home Depot, Target, and Lowes.  We believe consumers will continue to increase spending and be the driving force behind targeted companies in the consumer discretionary sector.  In addition, consumers are not burdened by high fuel costs as oil prices have recovered to $53 dollars a barrel and are likely to remain in a trading range of $45-$60 a barrel. This will also help to bolster consumer spending and consumption.       

As always, please call if you have any questions.

All the best and Happy New Year!

 

Quarterly Market Update

The markets have continued an impressive recovery from the lows at the beginning of the year and in the aftermath of BREXIT. The markets have drifted higher in the third quarter climbing a “Wall of Worry.” This commonly used Wall Street term describes a market that appreciates in the face of a lot of questions and headwinds. With the Federal Reserve still holding short term rates very low, investors have been buying higher quality stocks with dividends to replace the loss of yield on bonds. We believe this theme will continue for the next couple of quarters as the Federal Reserve tries to evaluate mixed economic reports and employ a cautious strategy to interest rates.

In contrast to our improving domestic economy, international economies are still searching for a sign of improvement. International economic numbers are showing little signs of recovery even in a negative interest rate environment. There is growing concern regarding the strength of the European Union agreements, as Britain very publicly voted to leave the Union in late June. In response to the struggling international markets, most experts are forecasting US interest rates will remain lower for longer than originally anticipated. This will give foreign central banks time to try and stabilize their own economies.

The US consumer is showing signs of strength as automobile sales are still very strong, and the housing market has continued upwards from strong numbers last year. The labor markets are reporting wage inflation and US consumer discretionary spending is on the rise. We believe this will continue for the next couple quarters and carry the economy into sustainable economic growth.

Energy markets were stronger in the third quarter. On September 28, OPEC agreed to its first production cut in 8 years, sending global oil prices soaring by more than 5%. However, this agreement represents less than 1% of total global oil production. While the OPEC agreement may strengthen oil prices in the short term, it will likely have little long-term effect. Oil producing nations and members of OPEC are trying to support the price of oil to a level where profits are maximized but limit interest in energy alternatives like natural gas. We believe oil will trade in the $40-$60 a barrel range as oil producers balance output versus encouraging energy alternatives. 

The political environment has been concerning. As our country tries to evaluate the two candidates for president, the markets will try to find direction based on the risk associated with either candidate. Even though the president is the face of our nation, we believe that the congressional elections matter more as it relates to actual successful new policies. We will continue to monitor the political races and evaluate perceived risk associated with either party.

In conclusion, we believe the markets will continue to climb the “Wall of Worry” as the American consumer spending will be the defining influence on the economy.

As always, please contact us if you have any questions or you would like to discuss your accounts.

Quarterly Market Update

Since the rebound from the first quarter oil-related sell-off, the S&P 500 was trading in a range between 2,040 and 2,119. As oil prices moved towards $50/barrel, all eyes turned to the United Kingdom (UK) and its referendum on remaining in the European Union (EU). Despite the dire warnings about leaving, the UK voters elected to cut ties.

Markets hate surprises and uncertainty and the Brexit, as it has been named, brought both. The “yes” vote surprised investors, triggering a global sell-off. The S&P 500 and UK’s FTSE both lost about 5%, while Japan’s Nikei shed 8%. Markets will regain the lost ground, but it could take some time as investors sort through the uncertainty of a country exiting the EU for the first time. The unprecedented process could take up to two years as a massive number of agreements will need to be renegotiated or initiated--things like trade, movement of labor, and airspace just to name a few. Needless to say, the disruption of these negotiations will weigh on an already fragile EU and global recovery. The consensus is a negative economic impact on both the UK and the EU.

The European woes will wash ashore in the U.S. Our concerns begin with a stronger dollar. With the uncertainty in Europe, the U.S. dollar and Japanese yen will continue to strengthen as foreign investors flee to safety. The stronger dollar will create downward pressure on the price of oil and on U.S. companies’ profits overseas. A weakening economy in Europe and the UK will also dampen corporate profits.

Fortunately, unlike last year, oil is in a better place to weather this pressure. Saudi Arabia reported inventories have declined six straight months while they have pumped out oil at near-record levels. For now, we see oil continuing to trade in a range, somewhere between $40 to $55 per barrel. Relatively low and stable oil prices will help tremendously.

The U.S. economy continues to move forward unevenly. Business optimism remains low while the U.S. consumer confidence increased to mid-March levels. A strengthening EU recovery would have helped. Now U.S. economic growth depends more on the U.S. consumer. April retail sales were up, so that’s a good sign. Housing continues to provide good news--existing home sales and new home sales increased. Unemployment remains stable. However, only 38,000 jobs were added in April. Economic growth prospects were already adjusted downward before the Brexit. Undoubtedly, the Brexit will knock GDP down a few more tenths of a percent, edging towards 2%.

Expect greater volatility going forward as the negotiation process produces uncertainty. However, we believe the good news will outweigh the bad news and the market will climb higher through the volatility. Bonds could rally in the short term as interest rates will stay lower for longer as the world digests the economic news. We are committed to an overweight in domestic equities and an emphasis on quality, dividend-paying stocks.

As always, please contact us if you would like to discuss your accounts.

Quarterly Market Update

The market has been very volatile this quarter with a sharp downswing followed by a very nice recovery. The main driver of both was the price of oil. The early fears associated with falling oil prices were mitigated by a recovery in the oil market. We believe that the market and oil will be highly correlated until oil prices stabilize and begin trading in a range.

The reasons for the high correlation are many. Investors feared that oil prices fell due to a decrease in demand, signaling the onset of a recession and the need to sell equities to buy risk-free assets. In addition, the extreme fall-off in oil prices created the need for sovereign wealth funds of oil-producing countries to sell global equity positions in direct investments and hedge funds to close massive budget deficits. Finally, companies in the energy sector have high percentages of leverage. Banks have exposure to the energy sector through loans. Unsurprisingly, as oil dropped during the selloff, we saw the banking sector nearly double the losses of the S&P 500.

But it felt like the market was at odds with the economic trends, which seem to indicate an improving U.S. economy. Wage growth rebounded in March and year-over-year 2.3% wage inflation points to a tightening job market. Unemployment is hovering around 5%, and the job participation rate moved higher for the fourth consecutive month. The housing market is showing a 4-month inventory of houses (normal is 6 months). Facts like these were punctuated with an exclamation point at, what now appears to be, the bottom of the selloff. On February 11th, J.P. Morgan Chase’s CEO, Jamie Dimon took $27 million of his own money and purchased 500,000 shares of his company’s stock, as if to say, “This selloff belies the fundamentals of the bank and the economy.” Perhaps not coincidentally, the market has rallied since then.

The international scene is a different story as the economic recovery overseas struggles to find its footing. The European and Japanese central banks have gone further negative with their short-term interest rates. These global growth woes are clearly influencing the Federal Reserve Board’s interest rate decisions, reinforcing the fact that the Fed’s decision to raise rates no longer is constrained by its original targets of 6.5% unemployment and 2% inflation. This makes sense given that raising rates would strengthen the dollar, which would result in lower oil prices and U.S. corporate profits. Both consequences would negatively affect the U.S. economy.

Looking forward, we look for oil-producing countries to freeze and even cut production, creating enough price stability needed for global growth to gain traction. However, that could take some time. And while U.S. households are saving their gas-pump stimulus for now, we expect that to change as labor markets continue to tighten and wages increase. Consider also that rising rents, slowly rising interest rates, and increasing household formations will provide a tailwind to the starter house segment of the housing market. In all this, the Fed will likely only raise rates once or twice in 2016 enough to confirm the recovery’s progress and avoid choking it. That said, the market feels like it’s done with its big jump. Thus, for now, we would favor individual U.S. dividend-paying stocks.

Please contact us if you have questions about your individual account. We would welcome the opportunity to talk with you.

Market Update

When is a trunk not a storage space in a car? When the conversation is about a large, grey mammal that lives in India. Context matters. Similarly, in volatile markets like these, it’s important to view the most recent events in the context of more impactful, longer term trends. That is, the 10 percent decline in January—is it the beginning of a bear market or a normal correction in a bull market?

A major driver of markets in 2016 has been the price of oil. With oil prices looking like they would hit $20 a barrel, there was a bounce this past week when traders caught wind that oil-producing nations finally seem likely to cut production to stabilize prices. This will help move oil prices out of the spotlight and decouple them from influencing the market direction.

Furthermore, investors expected interest rates to be a major driver of markets this year. Specifically, they were concerned that raising rates too quickly could choke economic growth. This week, the Fed left the short-term interest rate unchanged due to continuing global economic weakness. Investors now believe that the Fed will raise rates one to three times in 2016 instead of the four to six originally anticipated, helping to ease concerns of an overly-aggressive rate hike policy.

Like the Fed, we are concerned about a faltering global recovery. However, it is clear that central banks are committed to stimulating their economies through further quantitative easing. Last week, European Central Bank’s Mario Draghi hinted that more stimulus would be discussed at the ECB’s March meeting due to concerns of deflation. This week the Bank of Japan announced negative interest rates. That is, banks pay interest on cash they leave sitting at the Bank of Japan. Also this week, China’s central bank took action, injecting more liquidity into its economy. Central banks clearly are taking action.

Ultimately, the market volatility we have seen the past month is not going away in the near term. But looking out over the rest of the year, good unemployment numbers overall (there is regional dislocation due to job losses in the energy sector) and persistent lower oil prices will result in higher U.S. consumer spending in other sectors. The positive earnings reports coming out during this earnings season may be reflective of this longer-term expectation. If this indeed is a developing trend, the U.S. consumer will stimulate domestic economic growth. As such, we believe that when the market recovers, the 10-percent decline in January will not be viewed as a change in trajectory, signaling the start of a bear market. Instead, it will be seen as a normal correction in a continuing bull market.

As always, please contact the office if you have any questions.