Week 45 Sitrep

The U.S. stock market continues to rally on better than expected corporate earnings. The S&P 500 Index closed at a new all-time high on Friday, up 1.49% for the week. The NASDAQ also closed at a new all-time high on Friday, up 1.75% for the week. The major indexes closed out the month of October with a collective sigh of relief given the history of difficult performance the month has seen.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/4/19

 

Health care companies have performed well after posting their 3rd quarter corporate earnings.1 The overall 2019 performance for health care, however, is not as strong given their underperformance in the first half of the year. The recent earnings results could be described as being “less ugly” than what was anticipated and thus the increase in stock prices. The energy sector could be described in much the same way, however there are other external factors affecting commodities, resources and materials.

Source; Bespoke Investment Group, The Bespoke Report, November 1, 2019

 

As we’ve discussed in prior letters, there are more than $17 trillion of bonds in the world with negative interest rates. The negative interest rates are driving global investors to seek better returns (or at least a return that is positive!!) in the U.S. bond market. The amount of global money purchasing U.S. bonds has kept U.S. interest rates low, driven the price of bonds higher and pushed the value of the U.S. dollar higher relative to other currencies. That coincides with relatively low inflation by historical standards.2 In addition to that, the Trump administration and Congress have been busy removing costly regulations that have helped the U.S. become an oil and gas exporter rather than strictly an importer from other countries. Traditionally, commodities (including oil) will underperform when the dollar is strong, inflation is weak, and supply is plentiful.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/4/19

 

It was a good week (and month) for small companies as the Russell 2000, a widely followed small company benchmark, rose 1.99% for the week (4.41% for October). Small companies continue to lag their larger company counterparts by a fairly wide margin while carrying a higher level of volatility. Even though the S&P 500 and NASDAQ closed at all time highs last week, the Russell 2000 Index has yet to close at a new high.

Source; Bespoke Investment Group, The Bespoke Report, November 1, 2019

Source: SentimenTrader.com, “One of these things is not like the other”, November 5, 2019

 

As much as we celebrate new highs for the broad indexes, it is a healthy sign to see the individual sectors within the index hitting new highs as well. That didn’t happen last week, but we are close to seeing many record new highs in the coming weeks potentially. Jason Goepfort of SentimenTrader.com notes that, on average, 3-4 sectors would normally hit new highs along with the major index. If we do NOT see more sectors hitting new highs, then the markets would historically follow with weaker performance.3 (As of this writing, several sectors have just crossed new highs).

Source: SentimenTrader.com, 2 Participation Problems, November 4, 2019

 

As we stated last week, the drivers of recent market performance include relaxed tensions on trade discussions as well as better than expected results in corporate earnings reports. As of Friday, 76% of companies in the S&P 500 that have reported earnings have beat analyst estimates.4 Most analysts were predicting a small decline in total earnings growth this quarter for the index, led primarily by weaker earnings growth for energy and materials companies.5 A decline in earnings growth is not unexpected and does not automatically portend immediate trouble for the U.S. markets. Earnings growth in 2018 was exceptional due to the passing of the tax bill at the end of 2017. The market is adjusting to more realistic expectations in 2019.

Source; Factset Insight, S&P 500 Earnings Season Update, November 1, 2019

 

Source: Factset Insight, S&P 500 Earnings Season Update, November 1, 2019

 

The Federal Reserve Board met last week and lowered their target for short-term interest rates by 0.25% as expected. The bond market responded with slightly lower rates for U.S. Treasury bonds. Interest rates remain significantly lower than this time in 2018 as the 10-year U.S. Treasury Bond yield has fallen from 3.14% to the current 1.73%. The Federal Reserve Board announced that this would be the last cut in interest rates for the foreseeable future and they would “act as appropriate” to sustain the economic expansion.6 The stock market generally liked the comments and posted a nice gain on the day of the announcement.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/4/19

 

Our supply/demand indicators continue to show increasing demand for U.S. stocks. The trends have expanded for our long-term, intermediate and short-term indicators. Of note, in the last few days, the long-term indicator for international equities has recently turned positive after spending nearly five months in a negative position. We will continue to look for this trend to be confirmed in the coming weeks before we would look to add any international investments to client portfolios. As a reminder, the demand metrics we follow are used to determine when the appropriate risk/reward variables favor various investment options. When an indicator turns negative, we would begin to look at reducing risk in the appropriate assets.

Lastly, the stock market is entering a seasonally favorable period in November and December. Historically, the month of November has seen very good stock returns for the Dow Jones Industrial Average (DJIA) and the S&P 500 Index. According to Bespoke Investment Group, the last 20 years has seen the month of November with positive stock returns 70% of the time. The average return for the DJIA during the month is 1.65%, which ranks amongst the better months of the year for stocks.7

Source: Bespoke Investment Group, The Bespoke Report, November 1, 2019

 

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. Bespoke Investment Group, The Bespoke Report, 11/1/19
2. First Trust Advisors, Brian Wesbury, Monday Morning Outlook, 11/4/19
3. Sentimentrader.com, Jason Goepfort, 2 Participation Problems, 11/4/19
4. Factset Insight, John Butters, S&P 500 Earnings Season Update, 11/1/19
5. Factset Insight, John Butters, S&P 500 Earnings Season Update, 11/1/19
6. Bespoke Investment Group, The Bespoke Report, 11/1/19
7. Bespoke Investment Group, The Bespoke Report, 11/1/19

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