Weeks 48-49 Sitrep

The S&P 500 continued its winning ways last week – the market was up just under 1% for the short week due to the Thanksgiving holiday. The month of November was a very good month for nearly all stock indexes. The S&P 500 finished up nearly 3.6% for the month and is up better than 25% for the year. While the month of November was very good for the S&P 500, it was only the fourth best month for 2019 – this has been a good year for stocks!1 The NASDAQ also posted a strong month up more than 4.5% in November.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/2/19

 

The S&P 500 Index had the best year through Thanksgiving since 2013. Bespoke Investment Group reports that historical years with such strong performance saw the market continue upward 77% of the time through December.2 The best sectors for November included health care and financials; two sectors with historically low valuations and lackluster performance earlier this year. Energy continues to be the laggard sector posting a 5.5% return for the year, more than 10% less than the next closest sector. Energy sector performance continues to be weak despite the price of WTI oil going from $45.15 per barrel at the end of 2018 to a current $55.42, a 23% increase.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/2/19

 

There is a distinct difference in stock market performance since the more recent breakout began. The S&P 500 Index has moved notably above the prior trends and appears to be moving out of the trading range it has occupied since January 2018. Many of our technical market analysts see positive trends developing that give us confidence as we move into the final month of the year. December seasonality is favorable for stocks, despite the “hangover” we all feel from 2018. December has a historic return of 1.45% for the Dow but we also acknowledge that, on average, December is the second strongest month for returns right after November.3

Source; Bespoke Investment Group, The Bespoke Report, November 22, 2019

Source; Bespoke Investment Group, The Bespoke Report, November 22, 2019

 

We continue to monitor the U.S. economy for signs of weakness but have struggled to find anything that would indicate a recession is nearby. The data is largely mixed but continues to show signs of moderate improvement in GDP growth. Data from Bespoke Investment Group confirms the flatter economic period we have been experiencing since early 2018 is ongoing. Bespoke notes, however, that is not uncommon to see sideways movement in the ratio of leading economic indicators to coincident economic indicators.4 The recent move sideways is notably different than the rapid decline in the ratio during prior pre-recessionary periods.

Source; Bespoke Investment Group, The Bespoke Report, November 22, 2019

 

It is interesting to reflect on the last decade since the “Great Recession” of 2008 and how stocks have performed since then. While we believe that a year like 2019 is remarkable performance for stocks (up 27.6% for the S&P 500!), the last ten years have seen better-than-average returns for the index consistently. The chart below looks at the returns for the S&P 500 Index over various periods ending November 30th. The current environment has been better than average. The 20-year return of the index, however, is much lower than average. We feel this is important to consider when gauging why so many investors are concerned with risk and have chosen to stay in very conservative portfolios. The stock returns during the last two major recessions (2002 and 2008) have jaded our sentiment on stocks. Those two periods have kept the 20-year average return on stocks nearly 5% below the long-term average.5

Source; Bespoke Investment Group, The Bespoke Report, November 15, 2019

 

Our supply/demand indicators continue to show increasing demand for U.S. stocks. While the indicators have steadily increased most of this year, we are not seeing exceedingly strong indicator values. The indicator value for U.S. equities over the long-term is only 66.36. The same indicator in the fall of 2018 was approaching 74. Bonds/fixed income continue to see strong demand as well, which is interesting given the strong performance of stocks recently. Traditionally we would expect to see investors chasing the significant returns in stocks and leaving their bond positions behind. It would appear, however, there is still a concern for safety and investors are willing to miss out on the potential for additional gains in stocks for the presumed security of bonds. That would align well with other data we are seeing regarding individual investors confidence in the stock market.

Interest rates appear to have leveled off as the 10-year U.S. Treasury bond closed the week unchanged at 1.77%. Despite the ups and downs of interest rates this year, the 10-year bond is still lower by nearly 1% since the close of 2018. Mortgage rates have continued lower as well sparking demand for housing that benefits the U.S. economy. The 30-year Treasury appears steady at 2.21%.6 This levelling off of interest rates could present an opportunity for some who are still employed and monitoring the lump sum values of their pension for the first quarter.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/2/19

 

Many of you have heard us comment about how markets perform during various years of the Presidential term. History has shown that the third year of a Presidential term is the best performing for stocks. Many analysts feel this is because the introduction of controversial legislation is usually completed by the end of the second year in office. The third year tends to be a year for a sitting President or Congress to reflect on things that have worked well, especially a first-term President if he/she is considering reelection. The fourth year of the Presidential term, which is also an election year, has averaged about the same as the first year of the term. The obvious distinction about this Presidential term is the outperformance of stocks in year one and year three. The second year was the rough one as the market dealt with uncertainty regarding Fed policy during the last quarter of 2018.7

Source; Bespoke Investment Group, The Bespoke Report, November 22, 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, 11/22/19
2. Bespoke Investment Group, The Bespoke Report, 11/22/19
3. Bespoke Investment Group, The Bespoke Report, 11/22/19
4. Bespoke Investment Group, The Bespoke Report, 11/22/19
5. Bespoke Investment Group, The Bespoke Report, 11/22/19
6. J.P. Morgan Asset Management, Weekly Market Recap, 12/2/19
7. Bespoke Investment Group, The Bespoke Report, 11/22/19

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