To execute a vision, you’ve got to tune out the noise. – Jonathan Adler
Our role is to help execute your financial vision. As such, while we are always listening to the markets, we look to tune out the noise.
February 2018 was a very noisy month.
U.S. equity markets hit a speed bump in February, ending a 15-month streak of positive monthly returns on the benchmark S&P 500 index, which fell -3.69% on the month. Volatility surged, and the S&P 500 had 12 market sessions with more than a +/- 1% move, the most in more than two years. The last time the market saw this much turbulence was February 2016. Back then the culprit was declining oil prices. This year the catalyst was a hint of inflation and rising interest rates. This increase in volatility was not unexpected albeit a bit sharper than anticipated.
Many factors influence the equity markets but the most important is corporate earnings. As things stand right now, corporate earnings look quite solid. According to FactSet “ For Q4 2017 (with 90% of the companies in the S&P 500 reporting actual results for the quarter), 74% of S&P 500 companies have reported positive EPS (earnings per share) surprises and 78% have reported positive sales surprises. If 78% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008. Earnings Growth for Q4 2017: the blended earnings growth rate for the S&P 500 is 14.8%. If 14.8% is the final number for the quarter, it will mark the highest earnings growth since Q3 2011 (16.8%).” Earnings growth, more than anything else, is what drives stock prices. Until we start to see signs that corporate earnings may disappoint investors, we will continue to give the benefit of the doubt to stocks over the intermediate and longer terms.
On the fixed income front, interest rates continue to creep higher. A hint of inflation, in the form of payroll wage increases, hit early in February pushing rates up sharply and precipitating the initial equity selloff. Rates settled down and the equity markets rebounded during the middle of the month. During the last week of the month, the new Federal Reserve Chairman, Jerome Powell, provided a relatively bullish economic outlook but increased the likelihood of a fourth rate hike in 2018, kicking off another round of selling in stocks.
There has been some concern that during the recent equity market sell off, bonds also sold off, failing to exhibit their traditional inverse relationship (stocks down=bonds up, and vice versa). While this was unusual, bonds continue to provide a portfolio buffer (they did not fall in price anywhere near as much as equities), and longer term, it is unlikely that the historical performance relationship has changed.
On the economic front, there are no signs of a slowdown or recession in the near future as the chart of Leading Economic Indicators below shows. You can see how the LEI has started to decline just prior to the start of the recessions in 2001 and 2008/2009. However, I am a bit concerned that recent economic policies in Washington may not be beneficial in the long term. Specifically, the recently announced tariffs on steel and aluminum have the potential to raise prices for important items like cars and consumer goods which hurts consumers. It also raises the possibility that other countries retaliate by imposing tariffs on US exports, which would hurt corporations and therefore jobs and corporate profits. Such actions would negatively impact the economy.
Putting it all together, we are watching interest rates and inflation closely, monitoring the equity markets for key support levels, and stand ready to make adjustments as conditions dictate.
Feel free to call us if you have any questions or concerns.
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March Calendar of Events (comments and additions for future months are always welcome)
March is Women’s History Month. Please says thanks to all the important women in your life.
March 8th International Women’s Day
March 11th Daylight Savings begins – Spring forward
March 17th St Patrick’s Day
March 20th Spring begins in US
March 30th Good Friday – Happy Easter season to all of the Christian faith
March 31st Passover begins – Chag Pesach Sameach to all of the Jewish faith
Sources: Nottingham Advisors, Yardeni Research, FactSet
Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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