“Tariffs Until the Market Shakes” & “Tightening Until Something Breaks!” – Nvest Nsights Q2 Newsletter

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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.

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Your “Family Love Letter”

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Did you ever write and share your “family love letter?”  It’s probably safe to say that each of us is aware of tragic situations where a loved one died at too young an age, maybe suddenly and unexpectedly.  These experiences are shocking, and it is natural to catch yourself wondering how those closest to the deceased will be cared for or work through the situation.  Loved ones often find they are ill-prepared to attend to many aspects of another’s life.

On the topic of estate planning, we are regularly encouraged to plan properly for a sudden incapacitation and/or death.  Unfortunately, the focus begins and ends with the execution of proper documents, titling of assets, and naming beneficiaries to various financial accounts.  Often overlooked however, is ensuring that appropriate family members and decision makers can access adequate information about their loved one’s assets, liabilities, and intentions.  And, even if deliberate thought was given to these matters, is information available and quickly accessible?

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Are They Driving Too Fast?! – Notes for Week Ended 6/15

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Following the most recent Fed rate hike decision last week, Fed Chairman Jay Powell went on record suggesting it is a puzzle why long bond yields are staying so stubbornly low. Yet for those well researched in the dynamics of the bond market and the crowd-based wisdom it can convey, the message is clear: the current rate-hiking pace of the Fed is believed to be unsustainable by the bond market and it will slow down economic growth if not made more glacial than presently being communicated. At present, short rates are rising more swiftly than the long-end of the curve is adjusting in recognition of faster economic growth; should the yield curve invert (meaning long rates are less than short dated ones), it signals a serious policy mistake has been committed and an economic recession should be anticipated.

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After Brief Affection with Foreign, US Investors Again Turn Sights To Home – Week Ended 6/8/11

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The first full week of June was again characterized by foggy and uncertain geopolitical headlines, but the number of positive fundamental developments continued to outweigh those that in isolation would be viewed with a negative lens. As a result, domestic equities managed to build on the positive result for May with an advance of +1.7% for the S&P500. The profile of the advance also implies that the current tone of the market is risk-seeking with more economically sensitive corners and asset classes within the market acting well. When including last week, the S&P500 is up +4.8% to-date in 2018 compared with small-size companies that sport a +9.5% return over the same period as measured by the Russell 2000. By contrast however, international baskets as measured by the MSCI EAFE index are only narrowly positive with just a +0.1% change YTD.

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Geopolitical Fog – Commentary for June

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“The biggest business in America is not autos, steel, television”, or apples. “It is the manufacture, refinement, and distribution of ‘anxiety’.” Such was penned by media legend Eric Sevareid (who was an American author and CBS radio and television news journalist from 1939 to 1977) when the “news” consisted of a morning newspaper and a half-hour of nightly national news. One would probably consider this a recently offered thought rather than from 1964. What might anyone say today about our constant barrage of “news”? News today seems more commentary and opinion in a wrapper called “news.” A “geopolitical fog” of “news” is creating a directionless market; issues consist of – tariffs/trade; rise in oil prices boosting inflation expectations; the Fed raising interest rates too fast and/or too much; mid-term election year; Italy/Spain politics; not to mention North Korea or Iran; and etc.

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“Sell-in-May” Advocates Likely Disappointed Thus Far – Week Ended 5/18/18

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The most watched of US indexes yielded slight ground during the week ended May 18, with the S&P500, Dow, and Nasdaq each sliding between -0.5% and -0.7%.  Bonds continued to experience downward price pressure with key interest rate benchmarks resuming their inching-up.  Weaker equity performance however comes on the heels of an eight day winning streak for the Dow, and an S&P500 that remains nearly +2.5% higher than it was at the end of April.  Most interesting perhaps is that what are often thought of as the more economically sensitive and risk-seeking sectors including Small-size companies, industrials and the transports, actually continuing to climb, creating an interesting and arguably positive divergence when looking beneath the surface.

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Robust Earnings More Than Just a Tax Cut Story – Week Ended 5/11/18

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US equities rebounded in the second week of May, with the broad S&P500 climbing by +2.4% and more cyclically sensitive areas of the market faring even better (Dow Transports +3.3%; Small-Caps +2.9% at the expense of defensive industries like Utilities -2.1%). The strong weekly performance was likely the combined result of unfaltering strength in 1Q earnings season (nearing a conclusion), softer than expected readings on inflation, and tough trade & tariff talk that seems to be thawing (obviously the situation is fluid and could reverse again quickly). On the geopolitical front, the US also recorded a win from N. Korea with the announced release and return of 3 prisoners back to home in the US.

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Tone Change – Commentary for May

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Market participants appear to believe inflation is back and will be sticking around.  That’s affecting how investors perceive the outlook and direction for the bond and stock market.  As such, this may be the first time since 1990 that diversification benefits achieved by mixing bonds and stocks together are changing.  Since late January, both stocks and bonds are caught in the crosscurrents of increased negative activity in Washington DC, namely tariffs and possible trade wars.  Add tax reform and fiscal spending which are boosting the prospects of rising federal deficits.  The markets are also aware 2018 is a mid-term election year, wherein the composition of Congress could change.  On the opposite side, still low but slowly normalizing interest rates, plus low inflation, plus a lot of money (liquidity) in the financial system, plus high confidence by consumers and businesses, all combine to provide a support backdrop for the economy and financial markets.

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Corporate Earnings Face Off Against Shifting Rate Environment – Week Ended 4/27/18

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The final full week of April might best be described as a tug of war between big macro concerns and favorable micro inputs. All of which combined such that the domestic stock market was unable to find direction throughout the week and concluded virtually unchanged over the 5 trading days ending April 27 (as measured by the S&P500 and broad Wilshire 5000). By contrast, reference-rate bonds on the other hand experienced a noteworthy development wherein the 10-year US Treasury climbed above 3% for the first time in more than 4 years (it closed the week just under at 2.96%) and the Fed is signaling no intention of slowing their hikes. As recent as year-end the same bond maturity sported a stubbornly low yield of just 2.4%; so the roughly +60 basis point rise represents a +25% adjustment in just 4 brief months. With the US Federal reserve and other major monetary authorities around the globe continuing to communicate a preference toward further normalization, including through rate hikes, rates seem poised to rise further.

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Political Volatility Still Driving Financial Markets; Can 1Q Earnings Ride to the Rescue – Week Ended 4/13/18

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Choppy market action that persisted throughout February and March is continuing this month against an increasingly unpredictable political backdrop. 2Q began with a horrible first day and stressed week, but the slide was reversed last week despite no shortage of fresh unsettling headlines. For the week ending Friday the 13th, the S&P added +2%; some of the momentum areas hardest hit in recent weeks (Amazon, Tesla, Facebook) also managed to enjoy some of the best relative performance as the negative news flow for them eased a touch. Interesting though amid the choppier weeks is that smaller-size companies have actually fared better than their larger-cap brethren. Of additional merit, credit spreads (often a leading indicator of problems below the surface) tightened last week, suggesting that while US equities remain in closer proximity to the lows of the correction range than the upper, the underlying economic and corporate fundamentals are still perceived as OK. In that regard, the correction is appearing to maturing, and maybe nearing a tradeable conclusion.

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