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.
In many respects, it is hard to recall a week in recent memory as eventful or bifurcated as the one just completed. For all the noteworthy data points, earnings releases, and developments, performance at broad index-level was perceptibly average. The Dow and S&P logged gains of roughly +0.5% each, but beneath the surface, performance among sectors and individual stocks was extraordinarily diverse. The technology sector for example was negatively impacted by the pummeling of heavyweights such as Facebook and Twitter following release of those companies’ respective quarterly earnings and can be blamed for the tech-heavy Nasdaq concluding the week down -1.1%. At the same time, the more tangible and traditional economy enjoyed a positive bump with the headline that the US and key international trading partners in Europe reached verbal agreements in principal to back away from tariffs and restrictive trade policies in what is one of the most globally integrated industries of automobile manufacture. Amid all the trade-war talk, might it be that when all is said and done we actually end up “free-er” trade than before any of the hostile rhetoric began 6 months ago? That is one non-consensus perspective that is beginning to gain some traction following the positive surprise last week.
The S&P500 marked time for the week ending July 20, perhaps a more normal experience amid a season where the calendar cannot be counted as a friend to investors. The fact that the markets are behaved however might be surprising when considering what seems to be a continued escalation of trade tension between the Trump administration and the rest of the world. Arguably, the exchange of words and proposed trade adjustments are difficult to dismiss as only threats; at this point it would seem more accurate to suggest an actual trade war is already in progress; a development that would be expected to slow long-term global economic progress all other things equal while at the same time raising prices (definition of stagflation). Still, diving beneath the surface of what the S&P500 might tell us, Dow theorists – who view to the transportation sector as a indicative signal for the broader economic pace – might find some consolation with the notable outperformance of the transportation based constituents when compared to the relative performance of the industrials last week (both groups outperformed the S&P as a whole last week). This offers a contrast with what was being observed in the recent 4-week period and even YTD to a lesser pronounced extent.
For the first time since early March, the S&P500 managed to move back above the level of 2800. This is a notable achievement against a backdrop of noisy headlines that include an escalating international trade war and a Federal Reserve board that seems to be saying it remains committed to tightening monetary policy at a pace faster that what its own longer-term view of the economy would call for. Yet while domestic markets are behaving kindly, international charts (both economic and financial markets) can only be characterized as weaker.
Combining the two commentary thoughts within Nvest Nsights this quarter, there are two watch points: the Fed tightening until something breaks, and tariffs until the market shakes. Of these two, the former worries us the most, longer-term. We are historically reminded about 1984 and 1994 – strong economies and slow markets to be followed by 1985 and 1995. Maybe 2018 (strong economy and slow market) is the bridge for 2019 when stocks advance faster than the economy. Keep watchful and stay invested. 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 Q2
TARIFFS UNTIL THE MARKET SHAKES
The US economy is still growing and will enjoy its 10th anniversary in July. Shortly, it will become the longest expansion on record. Its progress helped unemployment reach its lowest in 18 years, at 3.8%. And, the second quarter should produce double-digit earnings growth again, for the 3rd consecutive quarter. So far, the US economy and corporate earnings provide the underlying fundamentals to support the current bull market growing older (since 3/9/2009 or 112 months, or 9.3 years). US consumer confidence remains solid which is important since consumers drive about 70% of the US economy.