Week 27 Sitrep

The US stock market closed the first half of 2019 with some high accolades:

Since January 1, 2019

  • S&P 500 Index                   up 17.4%
  • DJIA Index                           up 14%
  • NASDAQ Composite        up 20.7%

The primary international markets were only slightly behind the US:

  • MSCI EAFE Index              up 14.49% (a broad index of developed nations)
  • MSCI Emerging Mkts       up 10.76%1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/1/19

 

Growth investing continues to outperform value investing while large companies barely outperformed smaller companies. The difference in each, however, remains only slight as the market returns for all asset classes have been very strong this year.2 As we have mentioned in prior week’s missives, the broad market participation in the rally this year is evidenced by the strength in the Cumulative Advance/Decline Line (A/D). The A/D Line measures the ratio of stocks that are rising versus falling over a set time period. Bespoke Investment Group has commented on the strong bullish sentiment exhibited by the A/D line over the last 12 months. The rising Cumulative A/D Line is confirming the recent rise in U.S. stock prices and showing how there are a broad number of stocks participating in this move higher. Bespoke believes that is a healthy sign of future market performance as well.3

Source: Bespoke Investment Group, Pros & Cons, 6/28/19

 

The strongest sectors for the year continue to be technology and consumer discretionary, although industrials and real estate have come on strong lately. Energy and health care continue to lag the rest of the market, even while posting enviable returns for 2019.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/1/19

 

The bond market continues to be a big surprise for the calendar year as well. We have witnessed most major interest rates fall since January 1st. Recall that when interest rates on bonds fall, the corresponding prices of those bonds usually rise. As a result, many bond indexes are now showing total returns (the return that includes interest payments and price changes) that would be indicative of a healthy stock market return:

Since January 1st:

  • Barclays US Aggregate Index               up 6.11% (a broad measure of U.S. bonds)
  • Barclays Investment Grade Index      up 9.85%
  • Barclays Municipal Bond (10yr)        up 5.36% (a measure of tax-free bonds)4

Interest rate comparisons over the last several periods include:

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/1/19

 

Bespoke Investment Group aptly points out that the decline in interest rates is not limited to the U.S. markets. Rates have fallen all over the globe in the full range of bond maturities. Lower interest rates have historically been helpful to stimulate economic growth. Lower rates will often make housing more affordable as well.5

Source: Bespoke Investment Group, Pros & Cons, 6/28/19

Source: Bespoke Investment Group, Pros & Cons, 6/28/19

 

Our investment committee continues to look at coming economic and market data as positive for the markets. For the month of July, we will look forward to:

  • The beginning of 2nd quarter earnings season (the second week of July)
  • The next meeting for the Federal Reserve FOMC (July 30-31)
  • Continued news of trade negotiations between the U.S. and China
  • Ongoing economic updates including the first estimate of 2nd quarter GDP

We have noticed that analyst outlooks for U.S. corporate earnings and U.S. economic growth has been slightly negative in the last few months. It may seem illogical to think that is good news. However, we have noted that the opportunity for economic or earnings surprises increases when estimates are subdued. Bespoke Investment Group recently commented on this phenomenon over the weekend:

“Negative sentiment heading into earnings season typically leads to positive market returns during earnings season. When the revisions spread has been as negative heading into earnings season, the S&P 500 saw an average earnings season gain of 3.29% with gains 80% of the time.”  — Bespoke Investment Group, Pros & Cons, June 28, 2019

Source: Bespoke Investment Group, Pros & Cons, 6/28/19

 

Our investment committee does recognize some concerns in the current environment, including the continual inverted yield curve and slowing global economic conditions. The U.S. stock market reflects these concerns as well. As the market has recovered the losses experienced in the 4th quarter of 2018, the S&P 500 Index seems to stall each time it hits the high-water marks of the past.6 We recognized that in last week’s letter and discussed how the bull market since 2009 has been built on three large moves up (2009-2010, 2013-2014, and 2017-2018). In between those moves up, the market has moved sideways with a bit of volatility each time. We have been stuck in the sideways market since January 2018 and the market is looking for an impetus to move higher or lower.7 Our thesis is that the market will likely experience another leg up before the current bull market is over. However, we will update our thesis as the economic and market news changes.

Source: Bespoke Investment Group, Pros & Cons, 6/28/19

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. P. Morgan Asset Management, Weekly Update, 7/1/19
2. P. Morgan Asset Management, Weekly Update, 7/1/19
3. Bespoke Investment Group, Pros and Cons, 6/28/19
4. P. Morgan Asset Management, Weekly Update, 7/1/19
5. Bespoke Investment Group, Pros and Cons, 6/28/19
6. Saut Strategy, Weekly Strategy Notes, 7/1/19
7. Bespoke Investment Group, Pros and Cons, 6/28/19

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