Week 38 Sitrep

Stock markets around the world rallied higher last week on several pieces of economic news. The most significant news of the week was an announcement from the European Central Bank (ECB) that the central bank would lower interest rates to an even lower negative number. However, the big news was that the ECB announced they would increase their purchases of bonds to help stimulate demand in the markets.1 Clearly, their hope is to incentivize growth by positioning themselves as a buyer which would not normally be present in an open market. The result was higher stock prices in nearly every index.

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 16, 2019

 

As we would expect, the promise of more government spending in Europe gives the market hope for avoiding recession. Thus, the rise in interest rates across the board was expected. The U.S. treasury bond market saw a marked increase in rates as the benchmark 10-yr bond rose from the low mark of 1.42% on September 3rd to 1.90% last Friday.2 That’s a very significant move in a short period of time – a total change of 34% in just two weeks! The 30-year treasury bond rose to 2.37% as of last Friday from its lows of 1.96% just a few weeks ago. Aren’t bonds supposed to be boring?!?

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 16, 2019

 

And the market “teeter-totter” continues to roll back and forth. All market participants are trying to anticipate whether the economy will continue to grow into the longest economic expansion of all time. The news in August clearly was interpreted as “recession is right around the corner” while the mood in September has changed to “growth must go on!”. It’s very easy to get caught up in the headlines/tweets as they shift from one side to the other. Our investment committee continues to make a base case for focusing on evidence-based economic and market research.

Source: Bespoke Investment Group, The Bespoke Report, September 13, 2019

 

Our research continues to show the U.S. economy is expansion mode, albeit slightly slower than 2017-2018. The 2nd quarter report of GDP growth was up 2%, driven largely by consumer growth.3 Expectations for 3rd quarter GDP growth are in line with the same trend as the prior quarter. Unemployment remains at generational lows (3.7%) and shows strength in all demographics of workers.4 U.S companies have grown earnings at a steady 4.9% in the past year while the impact of tariff threats have put challenges on corporate earnings for global companies.5 Finally, inflation as measured by core CPI continues to be moderate at 2.4%, although that is the highest reading since 2008.6 These data points will make it difficult for the Federal Reserve to justify lower interest rates beyond September.

 

A few interesting, if not humorous, trends we see that evidence an expanding economy include consumer behavior. Americans over the last five years are exercising their increased confidence by choosing to eat outside the home rather than cooking.7

Source: Bespoke Investment Group, The Bespoke Report, September 13, 2019

 

Additionally, the shift in consumer behavior towards shopping continues to play out as expected. Traditional “brick-and-mortar” stores are struggling to keep consumer attention while online shopping has garnered a significant share of retail sales.8 Many of you will relate to this as we begin thinking about holiday shopping and the joy of shopping from home compared to fighting the crowds at the stores.

Source: Bespoke Investment Group, The Bespoke Report, September 13, 2019

 

Less obvious to most investors, our research in September has shown a strong shift in which stocks are performing well. We have witnessed strong performance all year from large companies demonstrating high quality and rising earnings growth. The international and smaller U.S. companies have been lagging in 2019. However, since Labor Day, the stronger performance in the market has been coming from companies that are smaller and possess more conservative value characteristics.9

Source: Bespoke Investment Group, The Bespoke Report, September 13, 2019

 

We have seen the market generate this kind of reversal in short-term performance before and will continue to monitor to determine if the trend will persist. Our investment process focuses on sustainable trends in demand for various asset classes and will accommodate a change in trend if the market supports the change. Whether the rotation comes as investors anticipate continued economic growth or is simply due to professional managers seeking to rebalance their portfolios before the end of the quarter remains to be seen.

 

This is an important week for the markets as we see how investors will anticipate the impact of the Saudi Arabia refinery attacks. The initial reaction of oil prices has sent most energy stocks up, but we need to know the longer-term impact of any supply reductions from Saudi Arabia. Since many of our clients are directly involved with the oil & gas industry, we will devote more time to this discussion in next week’s letter. For now, suffice to say that historical changes in WTI prices ultimately have a nice impact on energy companies.10

Source: Bespoke Investment Group, Chart of the Day, September 16, 2019

 

We also will hear from the Federal Reserve on Wednesday regarding any change in interest rates. The market is expecting the Fed to cut rates by 0.25% but the economic data is mixed. Clearly the U.S. stock market will be disappointed if the Fed decides not to change interest rates.

 

An interesting, but unimportant, fact of the week from our friends at Saut Strategy came across my desk this morning. 25 years ago, in 1994, theaters had five movies showing at the same time including Forrest Gump, Jurassic Park, Shawshank Redemption, Lion King and Pulp Fiction.11 Can you imagine a lineup like that in theaters today? Clearly, we are showing our age as we long for that kind of quality out of Hollywood today!

 

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. First Trust Advisors, Brian Wesbury, Monday Morning Outlook, 9/16/19
2. J.P. Morgan Asset Management, Weekly Market Update, 9/16/19
3. J.P. Morgan Asset Management, Weekly Economic Update, 9/16/19
4. J.P. Morgan Asset Management, Weekly Economic Update, 9/16/19
5. J.P. Morgan Asset Management, Weekly Economic Update, 9/16/19
6. J.P. Morgan Asset Management, Weekly Economic Update, 9/16/19
7. Bespoke Investment Group, The Bespoke Report, 9/13/19
8. Bespoke Investment Group, The Bespoke Report, 9/13/19
9. Bespoke Investment Group, The Bespoke Report, 9/13/19
10. Bespoke Investment Group, Chart of the Day, 9/16/2019
11. Saut Strategy, Jeffrey Saut, Monday Morning Outlook, 9/16/19

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