Week 37 Sitrep

The U.S. stock market continued to build momentum last week as the S&P 500 Index and the NASDAQ Index each gained 1.8%. The international indexes experienced similar moves as all markets welcomed the continuing news that the U.S. and China will gather for renewed trade talks in October. As a result of investors willing to take on more risk in stocks, most major countries saw interest rates rise slightly. Recall that interest rates will rise when bond prices fall; an expected move when demand for bonds falls.

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 9, 2019

 

Interest rates in the U.S. Treasury market remain at the lower end of their ranges for 2019. The benchmark 10-year U.S. Treasury rose slightly to 1.55% on Friday, an extremely low yield for a U.S. investor. However, foreign investors still find our yields very attractive relative to what they see at home. The 10-year German Bund currently has a negative yield at -0.62%. Japan, likewise, is showing a negative 0.24% yield on the 10-year Japanese Government Bond.1 What’s not to like about the safest investment in the world (U.S. Treasuries) with a positive 1.55% yield?!?

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 9, 2019

 

The S&P 500 Index made some significant moves last week after the holiday. Tuesday looked like a difficult day with some troubling economic reports. Wednesday’s tweet headlines, however, stole the show when President Trump announced renewed efforts to schedule trade talks with China in October. Based on that news, the markets shrugged off the mediocre economic news and moved higher for the week. Importantly, the move higher sent the index beyond prior resistance that helps us believe the challenges of August may be behind us for now.

Source: Bespoke Investment Group, The Bespoke Report, September 6, 2019

 

Stocks still have a way to go before they compete for a new all-time high; the S&P 500 closed at 3025 on July 26, 2019 for its last all-time high. Many stock sectors consist of companies whose stock is trading below it’s 50-day moving average. According to Bespoke Investment Group, the sectors that have underperformed the most include energy, materials and financials.2 That has been reflected in the sector performance this year as well:

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 9, 2019

 

Our investment committee believes that the market is looking for 3rd quarter earnings growth that will convince investors we are not on the verge of an economic recession. While analysts continue to lower their estimates for earnings growth in the 3rd quarter, we see a major divergence in companies who operate with more global exposure. Factset reports that stock analysts are concerned about companies that could be impacted by trade tensions. Those analysts have lowered their estimates more for U.S. companies that rely on global growth while companies who derive greater than 50% of their revenue from the U.S. markets are expecting to see a modest increase in earnings growth.3

Source: Factset Insight, John Butters, September 6, 2019

 

Could a resolution in trade tensions actually cause an inc     rease in earnings expectations toward the end of 2019? We will wait and see as earnings season begins the second week of October. In the meantime, there are a growing number of economic reports that are beginning to look positive. Bespoke often cites the Citi Economic Surprise Index, which “measures the pace at which economic indicators are coming in ahead of or below consensus forecasts”.4 The Index had its first uptick since February 2019 showing that economic reports are now coming in better than expected.

Source: Bespoke Investment Group, The Bespoke Report, September 6, 2019

 

Based on the current environment of low interest rates, low inflation and steady corporate earnings, our investment committee remains positive on the current economic and market environment. There are definitely more risks present in the coming quarters that will be discussed in future weeks with you. As a result, our portfolio remains tilted toward high quality, large U.S. companies for our stock positions. The bond portfolio continues to focus on high quality, shorter maturity bonds to offer protection from the current volatility.

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, 9/9/19

2. Bespoke Investment Group, The Bespoke Report, 9/6/19

3. Factset Insight, John Butters, 9/6/19

4. Bespoke Investment Group, The Bespoke Report, 9/6/19

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