Despite continued skittish trading behavior and large daily gyrations, shares of US equities concluded the week ending October 19 roughly unchanged from where they began. The S&P500 finished less than -0.01% lower while the more concentrated Dow Jones Industrial Average added +0.4%; perhaps the broadest domestic measuring stick, the Wilshire 5000, also concluded essentially flat for the week, but is off -5.5% month-to-date and brings the year-to-date performance to a very scant +2.8%. With the reality that markets look dramatically more concerned than just 3 weeks ago (at September 30), the most natural question one might ponder is, “what is so different to justify the dramatic tone change?”
What a difference 8 days can make! After turning in the best quarterly performance in several years, the new month and start of 4Q has been no friend to investors. If you’ve been following the financial media at all in the last week or so, you are aware that the recent market stress is being attributed to a swift upward adjustment in bond yields. Most notably, yields on US Treasuries (particularly the 10 year) have quickly increased as the bond market seems to finally be responding to the stronger than trend economic growth in progress. This strength, when coupled with unemployment hitting its
lowest rate in 49 years (recent tick 3.7%) is being extrapolated to mean more robust wage growth is on the short horizon, and wage growth is historically the primary driver of broad-based inflation. And, if Continue reading
In our quarterly newsletter that follows, the two feature articles are titled: “A Great Story Never Told” and “Flying on One Engine”. The first discusses the prevailing skepticism, or even outright pessimism, that may best characterize the consensus of investors’ psychological mindset relating to what is now the longest bull market in US history. The second article explores what are the polarized and opposing views of how the economic and corporate fundamental “tea leaves” are being interpreted and highlights what we see are the biggest risks threatening to halt the progressing bull market. We encourage you to review the full articles contained in our quarterly newsletter below. The full printer-friendly document can be downloaded here: NVEST NSIGHTS 3Q
A GREAT STORY NEVER TOLD
Following a tug-of-war market experience during the first 6 months of 2018, stocks surged ahead during the 3Q with the S&P500 up +7.2%. It was the fastest advance since late 2013. Combined with the first half, the accumulation brings the YTD rise to just over +10%. Company earnings and economic growth are rising at the fastest pace of this current cycle and expanding the current Bull Market run, yet these facts remain a great story never told. Few want to acknowledge this Bull Market is now the longest running ever. Also, few will acknowledge that the current economic rebound will shortly become the longest running ever. This current run approaching 10 years remains unloved for a variety of reasons, including the fact that many investors experienced 2 Bear Markets in 15 years. Those two experiences eroded investor portfolio values and family wealth, and wreaked havoc with investor confidence. In reality, the only situation where the length of this economic rebound and/or market advance is cited is when stating its age as a compelling reason to anticipate the current trends must soon end. Many continue to hold a keen aversion to owning risk assets even today.
It’s often said that “no matter how carefully something is planned, things may still go awry”. The saying is adapted from a well-known line in the Poem “To a Mouse” by Robert Burns. Perhaps Mr. Burns was in the process of retirement planning when crafting this poem? Regardless, its cautionary tone can be applied. As we work with clients helping them articulate and achieve financial goals, there are a number of areas that can be underestimated relative to actual spending.
US indexes continued their ascent higher during the third week of September, with the S&P500 adding +0.9%. The Dow, which tends to be a bit more heavily influenced by industrial sectors and the traditional goods-based economy (rather than services), fared even better with its add of +2.3%; that narrows its relative performance disadvantage against more services and technology focused sectors which are generally leading the domestic charge higher YTD. Transportation and Industrials, two areas watched by Dow theorists for economic signal, have also outperforming the broader market recently giving encouragement and a more optimistic thesis on the prospects for the market to continue on its march higher. International markets, which have been the most notable black-eye for diversified investors and those believing foreign markets represent a less expensive opportunity set, are also enjoying relative outperformance so far in September.
The month of September started a bit challenged following very strong runs in July and August; that is until last week when the S&P500 managed to rebound and conclude the week higher by +1.2% and bring the index back to a little better than break-even for the month-to-date. With the latest week, the S&P is now up a handsome +10.2% in 2018. The figure is remarkable considering US equities moved -12% lower between late-January and early-February and spending the better part of 6 months fighting to fully recover against a volatile political and global trade backdrop. International markets generally cannot claim the same resilience however. Emerging markets are off -9.2% YTD (and in bear market territory from their highs earlier this year); developed Europe is also negative YTD. Even within the US, performance is extraordinarily bifurcated; growth (tech, healthcare) enjoys a more than 1000 basis point favoritism vs. value (think energy, utilities, consumer staples). This growth-over-value bias is a carryover from much of the last several years, but made even more extreme in 2018. It is tempting to wonder if value (or international for that matter) will ever enjoy a sustained period in the sun again.
How old is someone born in a leap year, on February 29th? I guess it matters how and when you start counting. The current Bull Market started March 9, 2009. By most any measure, this Bull Market is now the longest running at 3,463 days. It achieved its “longest status” on August 21. Amazing though, this Bull Market is often not considered one. Not many believe in it and some stubborn skeptics still refer to it as a strong rally. Perhaps that is because many investors were under or un-invested during much of these years because of the two Bear Market drawdowns of almost 50% in 2000 and 2008. Many were afraid to re-invest following severe portfolio value loss and market volatility. Trying to time the market by following emotion is most always a very dangerous strategy and often results in a bad investment experience.
Despite ongoing financial stress emanating from the likes of Turkey and other emerging market economies in recent weeks, the US stock market (S&P500) managed to finally inch above the prior all-time highs set back in January. If that alone doesn’t speak to how resilient is the US stock market, it is also worth mentioning the political environment remains extremely challenging for Trump & Co., and by all expectations would signal that mid-term elections in November will result in a shift of control in Congress. Such an outcome would seem likely to further reduce what is already limited political capital for the balance of his 4-year term if not create increased uncertainty of impeachment. At the same time, weakness in international markets implies the globally synchronized growth story is dead just 12 months after it was first embraced and international was believed to be a better value and return opportunity. Most discussed this week however is that the current bull market being enjoyed in the US just became the longest such run in history, stealing the title from the 9.5 year period encompassing October 1990 to March 2000. This current run is not yet as powerful in terms of gains as the former, but make no mistake that the age of this run will be more loudly cited as one of the most compelling reasons to anticipate its end.
It was another eventful week around the globe, with broad but uncertain implications for financial markets. Most notable is escalating financial and economic turmoil in Turkey, which feels at least a little similar to episodes sourced in Greece or Italy in the recent 8 years; the term “contagion” spiked in financial searches on Friday and again being discussed is the interconnectedness of global finance. Since the beginning of 2018, the Turkish Lira (currency) has lost -41% against the US dollar and inflation in the country hit 16% last month. The S&P skidded -0.74% on Friday, but finished the week down just -0.2% and remains firmly positive month-to-date. All told, major US indexes are managing to absorb the unexpected potholes in the road so far and remain in close proximity to the all-time high levels last observed in January; but these headlines may mean a firmer ceiling on attaining new highs is imposed. At the same time, international markets continue to be a significant drag on investors committed to the discipline of maintaining some international diversification.Continue reading
“Extremist,” the word and its meaning, is not usually considered in a positive light. The term usually carries a negative connotation when describing a person (or group); one which attempts to bring about change using extreme methods. An “extremist” could be one who favors or resorts to immoderate, uncompromising, or fanatical methods of behavior to the point of being radical. Synonyms for “extremist” include fanatic, radical, zealot, agitator, revolutionary, die-hard, or ultraist. Yet some of the most historically significant moments and events are defined by individuals and organizations that were termed “extremist” – countless names/groups come to mind that could be categorized this way.