Week 31 Sitrep

The U.S. stock market returned to its winning ways last week – both the S&P 500 and NASDAQ indexes closed at record highs. The market has seen broad participation from many sectors leading to the new highs. Most notably:
• U.S. stocks continues to outperform developed international countries
• Large companies continue to outperform smaller companies
• Growth-oriented companies continue to outperform value-oriented companies
• The U.S. dollar enjoys a “strong” position relative to many foreign currencies1

Having said that, all areas of the market have performed well in 2019 and it is hard to be disappointed with any particular sector or market style in your portfolio.

Source; J.P. Morgan Asset Mgmt, Weekly Market Recap, July 29, 2019

Source; J.P. Morgan Asset Mgmt, Weekly Market Recap, July 29, 2019

We have written about the major drivers behind this stock market performance recently. The big four we discussed last month were:
1) Trade agreements and tariffs (especially involving the U.S. and China
2) U.S. economic news (fears it had been trending downward)
3) U.S. corporate earnings for the 2nd quarter (expectations were not good)
4) The Fed (promises of rate hikes in 2018 have turned into potential rate cuts)

Trade agreements appear to be moving in a favorable direction; however, we know that sentiment towards tariffs can change quickly. The good news for now is that the market has redirected its focus to the last three points from above.

U.S. economic news continues to arrive better than anticipated. The best example is the first estimate of U.S. GDP for the 2nd quarter announced last Friday as 2.1% (compared to an expected 1.9%). Despite the criticisms of many economists, the U.S. economy is still moving forward at a respectable rate given the length of this economic cycle.2 We expect many additional economic reports this week so stay tuned.

We are now in week two of earnings reports from U.S. companies for the 2nd quarter. Overall, we have received reports from 44% of the companies in the S&P 500 and the results have been favorable. John Butters of Factset Insight notes that 77% of companies are reporting earnings that are above what analysts were expecting.3 The strongest earnings growth has come from the health care and financial sectors.

Source: FactSet Insight, Earnings Season Update, July 26, 2019

Source: Bespoke Investment Group, The Bespoke Report, July 26, 2019

Finally, the Fed continues to guide the markets in a manner that supports future economic growth by promising to keep interest rates low, even at the cost of rising inflation.4 The next Fed meeting is this week on Tuesday and Wednesday. We will learn Wednesday afternoon if the Fed decides to lower interest rates by 0.25%. The stock market is clearly anticipating the move and would be disappointed if the Fed left rates unchanged.5

U.S. interest rates continue to stay on the lower end of their three-year range. We have seen interest rates on U.S. Treasury bonds fall dramatically this year while rates in many foreign countries have done the same.6

Source; J.P. Morgan Asset Mgmt, Weekly Market Recap, July 29, 2019

Source: Bespoke Investment Group, The Bespoke Report, July 26, 2019

Many economists have noted that U.S. Treasury rates are expecting slower economic growth in the near future. If the economic news continues to surprise stronger, we may see a rapid increase in interest rates in many bond sectors. Remember that when interest rates rise, it may cause the price of existing bonds to decline. Our investment committee continues to monitor the bond portfolios of our clients carefully and has reduced the risk in many different categories.

We continue to find favorable fundamentals and attractive yields in tax-free bonds. Over the long-term, tax-free bonds have three primary enemies:
• Rising interest rates in general
• Rising inflation (which could lead to rising interest rates)
• Deteriorating municipal credit
In 2019, we have witnessed falling interest rates, moderate inflation and steady municipal creditworthiness.7 This environment has led to positive performance for our clients using tax-free bonds in their portfolio.

Key things to watch this week include the Fed meeting and announcement on Wednesday, as well as the continuing corporate earnings releases. The summer months are often seen as slow for the markets and economic news. This year is shaping up to look a bit different as the markets continue to rise on better-than anticipated economic and earnings reports. It also appears that the Fed will be complicit towards the stock market by keeping rates low.

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

1. J.P. Morgan Asset Management, Weekly Market Update, 7/29/19
2. Brian Wesbury, First Trust Monday Morning Outlook, 7/29/19
3. Factset Insight, Earnings Season Update, 7/26/19
4. Brian Wesbury, First Trust Monday Morning Outlook, 7/29/19
5. Jeff Saut, Saut Strategy, July 29, 2019
6. Bespoke Investment Group, The Bespoke Report, 7/26/19
7. Nuveen Invesetments, Weekly Market Commentary, 7/29/19