Week 35 Sitrep

The latest headlines continue to drive the U.S. stock market back and forth. We have often heard the axiom that the stock market is a voting machine where investors place their vote on the outlook for the future. As you would expect, increased uncertainty on any subject will cause investors to pause and usually sends the market into a yo-yo pattern temporarily. Importantly, that does NOT mean a complete change in trend every time. U.S. stocks are still in an extended uptrend since March 2009. Last week, the S&P 500 Index gave back 1.4% of its 15%+ gain for 2019.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, August 26, 2019

Given the news headlines, one might think we have fallen off a cliff in the stock market as of late. If anything, investors may have a slight case of whiplash as the news sends stocks soaring higher one day only to give it all back the next. However, the markets remain within a close range of their all-time high back on July 26, 2019 when the S&P 500 closed at 3025. In fact, the bouncing action of the last month has seen the S&P 500 stay relatively close to a trading range of 2822 – 2930. This has resulted in the index remaining relatively flat since the beginning of 2018.2

Source: Bespoke Investment Group, The Bespoke Report, August 23, 2019

 

It is helpful for us to consider the long-term trends of the stock market to understand where we are today. In order to see the trends better, many analysts will look at the 200-day moving average of stock prices rather than a daily price change. This will effectively smooth the trend to see what has been happening in the past. When Bespoke Investment Group observes the current trends, it is obvious that the stock market has been in this flat trading range since early 2018.3

Source: Bespoke Investment Group, The Bespoke Report, August 23, 2019

 

The bull market since March 2009 has resulted in a substantial 361.8% return for the S&P 500 Index (assuming the reinvestment of dividends).4 However, as the chart above shows, the returns have come primarily in three uptrends followed by three flat trends. This is not an unusual pattern for the stock market to follow on a long-term basis. The “voting machine” of the stock market shows investors are currently uncertain how the discussion over trade agreements will conclude. The last uptrend was spurred by the passage of lower tax rates for businesses and consumers, as well as the relaxation of business regulations that led to better corporate earnings.

There is extended debate in the market as U.S. interest rates continue to fall for the year. Some analysts believe the lower interest rates portend a looming economic recession. However, said analysts are struggling to find additional economic evidence for that recession. Jeff Saut, chief strategist for Saut Strategy, points to the U.S. labor markets as a key indicator for future recessions. Specifically, the reported initial claims for new unemployment have risen only slightly in the last few months. The initial claims for unemployment will usually rise significantly as the U.S. economy is slowing into recession but we are not seeing that trend take place yet.5

Source: Saut Strategy by Jeffrey Saut, August 26, 2019

 

We also greatly respect the relationship between leading economic indicators and coincident economic indicators. This provides a “big picture” view of the U.S. economy and the various reports of economic activity we see remains positive. Bespoke adds that the current “leading indicator data does not look recessionary”.6

Source: Bespoke Investment Group, The Bespoke Report, August 23, 2019

 

Lastly, we would add that U.S. stocks continue to look attractive from a relative valuation standpoint. This month has seen the price-earnings ratio (P/E) stay close to historical averages at 16. Many sectors have a significant number of stocks trading below their 50-day moving average according to Bespoke.7 We are encouraged to add that, historically, this is a time of year when stocks have performed rather well. Again, Bespoke shows that the S&P 500 has averaged better than 3% gains in the period from late August into September.8

Source: Bespoke Investment Group, The Bespoke Report, August 23, 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. 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 Market Update, 8/26/19
2. Bespoke Investment Group, The Bespoke Report, 8/23/19
3. Bespoke Investment Group, The Bespoke Report, 8/23/19
4. DQYDJ.com; S&P 500 Return Calculator
5. Jeff Saut, Saut Strategy, August 26, 2019
6. Bespoke Investment Group, The Bespoke Report, 8/23/19
7. Bespoke Investment Group, The Bespoke Report, 8/23/19
8. Bespoke Investment Group, The Bespoke Report, 8/23/19

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