Week 32 Sitrep

The U.S. stock market did not like what it heard last week! We have been saying for several weeks that there were several factors affecting the stock market in recent months. From our letter last week, we wrote:

We have written about the major drivers behind this stock market performance recently. The big four we discussed last month were:

  • Trade agreements and tariffs (especially involving the U.S. and China)
  • S. economic news (fears it had been trending downward)
  • S. corporate earnings for the 2nd quarter (expectations were not good)
  • The Fed (promises of rate hikes in 2018 have turned into potential rate cuts)

Clearly, we would prioritize the last three as more significant than the first one. However, as we witnessed last week, it was the trade agreement that set the S&P 500 into a 3% decline. To be fair, the markets were down every day of last week, even before the announcement was made of new tariffs.1

Source; J.P. Morgan Asset Mgmt, Weekly Market Recap, August 5, 2019

 

As we typically see, the stocks with the biggest gains in 2019 were also down the most last week. Large companies focused on growth were down the most, however all asset classes experienced about the same decline. Given the decline last week, the year’s biggest gains still rest with the same large growth companies, including technology, real estate and communication services.2

Source; J.P. Morgan Asset Mgmt, Weekly Market Recap, August 5, 2019

 

The three important topics of U.S. economic news, corporate earnings and the Fed continue to look favorable for U.S. stocks. In fact, we have seen several good reports from economists that economic growth is better than anticipated in some areas. J.P. Morgan Asset Management shared a chart showing many economic indicators turning up better than anticipated.

Source; J.P. Morgan Asset Management, Weekly Market Recap, August 5, 2019

 

We have also heard from many companies reporting their 2nd quarter earnings and 64% have announced earnings better than expected. That is a better rate of growth than we have seen over the last two quarters and beats the average rate over the last five years.3

Source; Bespoke Investment Group, The Bespoke Report, August 2, 2019

 

That would leave the primary culprit for the market downturn to the trade agreements, which is not new for this market. Markets which trade lower on news headlines are always challenging as we do not have hard evidence of a change in trend. The bottom line is that uncertainty over trade agreements cause investors to desire lower risk in their portfolio’s. The only way for uncertainty to be reduced is for a favorable news headline to report progress in trade agreements. And we all know the variability in reporting that can come from our country’s “news reporters”! We personally tend to give them less credibility than market analysts or economists. As for the day-to-day results from last week, Bespoke shared an interesting chart:

Source; Bespoke Investment Group, The Bespoke Report, August 2, 2019

 

For long-term investors, the fundamental reasons to invest in U.S. stocks are still intact. The economic climate, combined with corporate earnings, maintain a favorable risk/reward outlook for investing in stocks. Since the current bull market began in 2009, the S&P 500 Index has experienced a 5% correction at least 25 different times, which would equate to a 5% correction every 5 months on average.4 In the meantime, the S&P 500 Index remains in a flat pattern since the August 2018 with a recent tendency to move higher.

Source; Bespoke Investment Group, The Bespoke Report, August 2, 2019

 

Our client portfolio’s have been positioned to manage risk since October 2018. Specifically, we have targeted large U.S.-based companies with a bias towards future growth. We also have an emphasis on high quality, which has reduced the volatility in the portfolio when the market experiences these drops. Our bond positions have also helped provide stability while providing modest returns since interest rates have fallen.

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. J.P. Morgan Asset Management, Weekly Market Update, 8/5/19
2. J.P. Morgan Asset Management, Weekly Market Update, 8/5/19
3. Factset Insight, Earnings Season Update, 8/2/19
4. Andrew Adams, Saut Strategy, Charts of the Week, August 7, 2019

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