Week 39 Sitrep

If you are a fan of drama, the stock market was the place to be last week! It was only a week ago that we watched the oil market closely for an anticipated price spike after the attack on Saudi Arabia’s oil fields. WTI Crude did experience an increase in price last Monday hitting $62.90 per barrel (up 15%). However, the price steadily declined throughout the week and opened this week closer to $58 per barrel. The decline was credited to a quick response by Saudi Arabia to get their fields back in operation as well as the weaker than expected economic growth numbers out of Germany.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 23, 2019

 

The U.S. stock market rode the emotion of the oil “shock” on Monday and Tuesday. Then on Wednesday we heard from the Federal Reserve Board. Fed governors agreed to lower interest rates by 0.25%, which the market was expecting. However, the reports that there was sharp disagreement amongst Fed governors sent the markets down by 1%. Chairman Powell was able to reassure the markets that further rate cuts were to be considered if, and when, necessary.2 The U.S. stock market has reason to be concerned on “Fed days” as the performance on those days has historically been disappointing.

Source: Bespoke Investment Group, The Bespoke Report, September 20, 2019

 

The net result for the week was the S&P 500 Index finishing down 0.49% while smaller companies were down more than 1% (Russell 2000 Index). We saw a return to 2019 tradition as large companies with growth orientations held up better than those with value orientations.

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 23, 2019

 

Interest rates declined nominally for the week as the 10-yr Treasury bond yielded 1.69%. Strangely, the U.S. Treasury bond market has been extremely volatile in the last few months. Interest rates have fallen dramatically all year, but especially so in August. According to Bespoke Investment Group, longer-dated Treasury bonds posted their largest price gain in August since December 2008.3

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 23, 2019

 

And now we have witnessed the worst beginning of a month for those same bonds since 1987! The long-term U.S. Treasury index fell 6.5% in the first 10 trading days of September.4

Source: Bespoke Investment Group, The Bespoke Report, September 20, 2019

 

We have stated numerous times that there are three primary drivers (there are multiple minor drivers) of short-term market performance:

  • Changes in corporate earnings expectations
  • Changes in U.S. economic expectations
  • Changes in expectations for political influences (in this case, trade agreements)

When the stock market sees expectations change or sees a rise in unknowns for the above-listed drivers, we typically witness rising volatility in the level of stock prices. A brief note about each:

 

Corporate earnings expectations:

FedEx caused an uproar last Wednesday warning analysts to expect lower earnings in the next quarter. Investors are now wondering whether that is a sign of things to come for other companies in October. Bespoke Investment Group reports that may not be the case as the reports we have seen for 3rd quarter earnings do not show any historical abnormalities for companies lowering earnings guidance.5

Source: Bespoke Investment Group, The Bespoke Report, September 20, 2019

 

U.S. economic expectations:

We mentioned last week that both U.S. and non-U.S. economic expectations have been increasing. Reports from unemployment and housing have been very encouraging over the last few weeks. When we compare the various economic indicators available, the odds of recession appear very low.6

Source: Bespoke Investment Group, The Bespoke Report, September 20, 2019

 

U.S. political influences:

There have been many reports that a trade agreement between the U.S. and China is drawing near…again. The market is expecting a return to the negotiating table in October and no news would be good news right now. However, the market took a dip on Friday afternoon when news reports showed a Chinese trade delegation canceling a planned tour of a Montana farm to discuss agricultural trade. There was no additional news, so we are not able to ascertain any ramifications for changes in trade currently. Stay tuned for any updated tweets!

 

In closing, our investment committee is still optimistic about U.S. stocks in the 4th quarter of 2019. A few bullets to explain our optimism:

  • A federal government very supportive of economic expansion (tax cuts, deregulation and increased government spending)
  • A Federal Reserve committed to economic growth (lower interest rates and added liquidity)
  • Favorable economic circumstances of low unemployment and low inflation with moderate wage growth
  • Slower growth and lower (negative) interest rates in Europe means stronger dollar
  • Corporate earnings that continue to grow relative to a mature economy7

We recognize that U.S. stocks will not always be favorable, and we have many tools at our disposal to reduce risk in portfolios when that happens. We routinely monitor bonds, alternative investments, non-U.S. investments and even cash for ideas that will support portfolio growth. Currently, U.S. stocks have the most attractive risk/reward potential for a moderate portfolio.

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. Bespoke Investment Group, The Bespoke Report, 9/20/19
2. Bespoke Investment Group, The Bespoke Report, 9/20/19
3. Bespoke Investment Group, The Bespoke Report, 9/20/19
4. Bespoke Investment Group, The Bespoke Report, 9/20/19
5. Bespoke Investment Group, The Bespoke Report, 9/20/19
6. Bespoke Investment Group, The Bespoke Report, 9/20/19
7. Cumberland Advisors, David Kotok, “Why We Bought Stocks Before Labor Day Weekend”, 9/9/19

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