Week 43 Sitrep

The U.S. stock market welcomed the corporate earnings season last week in a grand way. The S&P 500 Index finished up 0.55% while the Russell 2000 (smaller company) Index finished up 1.57%. International companies performed well on news that a potential solution for a peaceful Brexit would face a vote in parliament over the weekend.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/21/19

The British pound rallied on the news and caused the value of the U.S. dollar to decline modestly. Traditionally, a lower value to the U.S. dollar will benefit non-dollar investments such as international stocks and bonds, as well as U.S. companies with a strong global presence. These companies have not done as well as U.S.-based growth companies in the past year, partly due to the higher valuation of the U.S. dollar. The trend last week does not change what we have seen in 2019 as a strong year for mid & large sized companies focused on growth.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/21/19

Interest rates across the globe continue to rise nominally from their summer lows. The benchmark 10-year U.S. Treasury Bond closed the week at 1.76% while the 30-year U.S. Treasury Bond was at 2.25%.2 Mortgage rates continue to sit at attractive levels and have rewarded homebuilders with a strong year for new home sales. The “dilemma” for global interest rates, however, continues to be the large amount of foreign bonds with negative yields. The 10-year German Bund (not a typo) is now -0.39% and the 10-year Japanese Government Bond is -0.15%. It is estimated that there are more than $17 trillion worth of negative-yielding bonds in the global marketplace today.3 We continue to believe the high proportion of negative-yielding bonds will help U.S. interest rates stay low as economic growth slowly rebounds.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/21/19

Source: State Street Global Advisors, SPDR Monthly Chart Pack, 9/30/19

The U.S. stock market remains in a tight pattern since December 2017. The S&P 500 Index has been relatively flat but still shows a slight uptrend over the last three years. Technical analysts are encouraged as the range of the index has been very tight since April 2019 and appears headed for an inflection point where it could move higher or lower. The change could be in either direction, although we are encouraged by the move closer to all-time highs in the last two weeks.

Source: Bespoke Investment Group, The Bespoke Report, 10/18/19

Source: Bespoke Investment Group, The Bespoke Report, 10/18/19

Another encouraging sign for the U.S. index is a measure called the S&P 500 Cumulative A/D (Advance/Decline) Line. The cumulative A/D line is a ratio of the total number of stocks advancing versus the total number of stocks declining. A higher ratio usually indicates strength in the stock market as more stocks are advancing than declining. More importantly, we can track the A/D line over time just as we would the index itself. Bespoke Investment Group has noted numerous times that the A/D line will often precede the S&P 500 Index in an up or down direction. Recently, the A/D line hit another new high as shown below.4

Source: Bespoke Investment Group, New High for the S&P 500 Cumulative A/D Line, 10/21/19

Another trend we like to watch is how many stocks are trading above their 50-day moving average (50-DMA). The 50-DMA is simply an ever-changing line representing the average price of the stock in the last 50 days. When most stocks begin trading at prices below their 50-DMA, we look for reasons to be cautious as risk may be increasing. Conversely, when most stocks are trading above their 50-DMA we see an opportunity for reward for the risk we are taking. More specifically, our analysis shows several sectors where the majority of stocks are above their 50-DMA (a sign of strength in those sectors).5

Source: Bespoke Investment Group, The Bespoke Report, 10/21/19

Last week I introduced a tool that our investment committee follows to gauge investor demand for various assets. There are three indicators we follow based on the length of time we want to measure. There were no significant changes over the week as we saw investors show slightly more interest in U.S. stocks.

The intermediate and short-term indicators also showed signs of improvement over the course of the week. The intermediate indicator reflected a change in direction for both U.S. and international markets as both turned to upward trends.

U.S. corporate earnings season has begun, and the early results are encouraging for stock performance. We have only heard from about 15% of S&P 500 companies, but of those, 85% have reported earnings above their consensus expectations.6 Many of those companies were financial companies and we saw the effect of their increased share prices in a current holding in our client’s portfolios (IYF). Several health care companies also reported healthy earnings. We continue to receive negative earnings guidance from the energy industry as oil prices remain in the low-mid 50’s.

Source: Factset Insight, John Butters, S&P 500 Earnings Season Update, 10/18/19

Our investment committee is encouraged by the initial reports of corporate earnings; however, we acknowledge that most companies are reducing expectations. Overall, analysts are predicting that corporate earnings will decline nominally in the 3rd quarter but NOT at a level that is “recession-worthy”. We also have seen many of the updated U.S. economic reports coming in weaker than anticipated reflecting slower economic growth than in 2018. We are not surprised by this data as the economy of 2018 was spurred higher by the tax cuts.

It is important to note that the current economic numbers are also NOT reflecting an impending recession, however, we will continue to monitor closely for signs of slowing growth. We will receive estimates on 3rd quarter GDP (expecting +1.8%) in the next week.7 Recent inflation results show inflation remains tame at 1.6% and does not appear to be affecting the U.S. economy in a negative way. We believe that a resolution on current trade agreements, including the Congress passing the new agreement between the U.S., Canada and Mexico, will encourage economic growth for 2020.

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 or send an e-mail to cameron.malott@engravewealth.com. 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 Economic Update, 10/21/19
2. J.P. Morgan Asset Management, Weekly Economic Update, 10/21/19
3. State Street Global Advisors, SPDR Monthly Chart Pack, 9/30/19
4. Bespoke Investment Group, New High for the S&P 500 Cumulative A/D Line, 10/21/19
5. Bespoke Investment Group, The Bespoke Report, 10/18/19
6. Factset Insight, John Butters, S&P 500 Earnings Season Update, 10/18/19
7. First Trust Advisors, Brian Wesbury, Monday Morning Outlook, 10/21/19

Login