With the exception of May, 2019 is probably surprising most everyone in the investing community in quite positive fashion. Despite the realities that both economic and corporate earnings data appear to be in a trend of slowing, AND continued tariff/trade and political uncertainty both the S&P500 and Dow busted through respective round-number levels of 3,000 and 27,000 last week. So far in July, the S&P500 is up another +2.1% bringing the YTD climb to more than 20%. About 86% of the S&P500 constituents trading above their 50-day moving average. In the short-run, this probably means the market is overbought and due for a pause – that idea is also significant when one considers we are entering what is traditionally a weaker seasonal period. But more important is the message it tells about momentum present under the surface. Interestingly, all of this has happened at the same time the yield curve has remained troublingly flat (or inverted depending on the maturities inspected).
As we enter the 2nd half of 2019 it is difficult to recall a time when the market was hitting new highs but investor attitudes felt so indifferent. Rather, sentiment is guarded. This is likely due to a Federal Reserve that raised interest rates 4 times in 2018 and now appears to be “too tight” when also considering persistent uncertainty from international trade and tariff talk. Taken together, investors perceive the global economic outlook is at risk.
As this quarter’s Nvest Nsights newsletter highlights, the good news is those worries seem to be keeping the close attention of those with the power to resolve. “Can’t Live There” and “Missing – Reward” are efficient reads on the key items driving financial markets and context about the current (and now longest) economic expansion in US history. Strong starts to a year bode well for the balance, but we also submit that the path of both the market and policy (trade & monetary) adjustments may not be smooth. We also share several “Frequently Asked Questions” being received recently from clients; we hope you find those relevant and helpful.
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Careful! Avoid buying life insurance as a savings strategy! Stop buying it as a tax-deferral vehicle for retirement savings!
Insurance of any kind is a risk-management tool. From our perspective, an individual should buy life insurance for one reason: because there will be a financial impact on one’s family or business if they unexpectedly die. For most individuals, that financial impact is typically highest early in life when working years ahead are many, financial assets accumulated are low, and financially dependent children and/or significant debts (such as home mortgage) exist. Over time, one’s insurance need generally declines and ultimately reduces to zero at some point prior to retirement.
With just one week remaining in the month of June, the 2Q was a decidedly bumpier and more uncertain experience than enjoyed in the first 3 months of 2019. Make no mistake however, the most recent 18 months have been anything but smooth sailing (but aside from 2017, the market rarely is) as trade disputes and the path of monetary policy are recurring sources of tremor. Still, as we look to the quarter’s final trading days this week, the S&P500 is very near to recapturing all-time highs. This follows a strong week fueled by formal communication by the Fed that its monetary policy is shifting and a cut to rates will occur when it meets in July. Also assisting the equity market is welcome news that Trump and China’s Xi will talk concerning the current trade differences at a G-20 meeting in Japan this week. The news flow is again positive from the perspective of equity markets. Yet as friendly as those developments are, this should also serve as reminder that risks remain. Research firm Strategas recently put it this way: investors and markets are presently at the whim of three people – Fed Chairman Powell (unelected), President Trump (unpredictable), and President Xi (largely unaccountable). This should caution investors from getting too complacent.
Global equity markets are enjoying a swift recovery following their “distracting” adjustment last month. The S&P500 is up +5% over the first 10 trading days in June (thru 6/14), even as the trade dispute between the US and China is yet to show tangible signs of renewed repair. For the most part, improvement is being attributed to a more accommodating tone developing from Federal Reserve officials as they communicate their thoughts on the path of monetary policy and appear tipping their hat to a yield curve that is now inverted across some key maturities. The inversion in shorter-dated maturities is long thought a message that monetary policy is too tight for the economic conditions and outlook. It is in that regard that weaker economic data is now the market’s counter-intuitive friend. Just as strong economic data suggests to the Fed that tighter monetary policy is appropriate to keep the threat of inflation at bay, weaker data gives the Fed support to shift to an easier and more accommodating monetary policy even though the economic cycle is long. Bad news is good.
If you travel through the village of Mantua in northeast Ohio, don’t drive with a dog in your lap. Determined to stop distracted driving, the police are aggressively issuing tickets to curb behaviors such as driving with an animal sitting in your lap or texting. All around the world, new laws are being written to address distracted driving. It is also important to not let various happenings distract us from accomplishing important plans of life. That includes plans about your finances – financial planning and investing for the future. We all know from experience that life events can get in the way of advancing forward with best laid plans for the future. Nevertheless, keeping plans and goals in our foresight provides better chance to achieving them.
With just four trading days remaining for May, the “rear-view mirror-ists” will be quick to say investors should have expected the noticeable pullback coming (nevermind that the month of May was firmly positive in each of the last 5 years). The S&P500 is off -3.9% with most attributing the decline to renewed tension between the US and China over trade-related policy and the fact is that until recently, most investors anticipated a trade agreement was not just close, but a virtual certainty in early 2019. Combined with a US Fed that now seems firmly on hold from any additional interest rate hikes this year, the stock market enjoyed support. While the Fed still appears content with its patient posture (very important), a truce between the US and China on trade is no longer in clear sight. Interesting is that smaller-size companies which are often believed to be more insulated from the dynamics over global trade and should in theory experience less influence from tension are actually faring noticeable worse in this latest war of words. But more telling perhaps is that international equities and those domiciled in Asia especially are really getting crunched compared to US domiciled companies.
Following one of the best four-month stretches for equity markets in recent memory, the month of May is proving more challenging with the S&P500 experiencing its worst week of the year. Despite a better than expected quarter of economic growth during the 1Q and earnings that are not as soft as feared, optimistic sentiment of investors that propelled the markets to swift recovery is now deteriorating due to escalating tension between the US and China in its ongoing trade negotiation. The US view is that China backed away/recanted from prior commitments and broke the deal. As a result, the S&P500 suffered a setback of -2.1% last week even despite a late-day rise on Friday (perhaps a show of optimism that drama between the US/China might progress over the weekend). That trade-related uncertainty and market pressure looks set to continue into a new week on headlines that discussions over the weekend made little progress and actually seem to be moving further apart. Abroad, international equities and emerging markets in particular are being punished more acutely as evidenced by the MSCI EM index forfeiting -4.5% last week.
Four months of 2019 are in the history books and investors should be delighted, as January, February, March, and April were each positive performance experiences. The cumulative result is a total return exceeding +18% for the S&P500 index. That’s well ahead of the average January to April return of +3.7% over the past 25 years, and is an attractive return for most full years. A “4-peat” is rare, but not unprecedented with 2019 notching the 16th observation since 1950. The other 15 historical occurrences went on to provide an additional +10% average return for the final 8 months of the year, though there was usually a pullback (-8% on average) along the way. The S&P500 index added +4% during April boosting the strong 1Q returns. Client portfolios continued their advance, as both stocks and bonds provided positive returns.
It should be news to no one at this point that 2019 is off to a fantastic start – at least for investors who continued to “stand in the pocket” despite getting repeatedly knocked down during 4Q’18. As many market participants believed at the time, the reaction by the financial markets to perceived slowing of economic growth that was anticipated (and is playing out) during the 1Q was overdone. But in fairness to investors, perceived Government missteps (or perhaps more fairly described as inflexibility) both on monetary policy evolution (Fed tightening) and Trade (US-China) made it hard to maintain confidence in officials being able to do the right thing for the US economy in the face of persistent international economic weakness and uncertainty. Since that time, sentiment on both items has turned more favorable, leading to a swift recovery for domestic equities. Investors also find themselves questioning whether they have been too pessimistic over international economic and financial market prospects. Significant economic, regulatory, and political uncertainties hampered international investing success for much of this 10-year cycle, but lesser acknowledged is how much has been done to improve monetary policy transmission in support of the banking system and economic growth. This sets international markets for potential out-performance especially when considering valuations overseas are more attractive than domestic on a number of measures and the currencies are cheap relative to USD.