Week 44 Sitrep

U.S. corporate earnings season has been a welcoming sign for the stock market! The S&P 500 Index finished the week up 1.23% while the NASDAQ rose by 1.90%. The international markets also participated in the gains with the “developed market” MSCI EAFE index up 1.27%. Indeed, it was a good market for nearly all global stock indexes!

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/28/19,

 

Both large and small companies benefitted last week, although the large companies have been the best performers in 2019. Growth companies continue to outperform value companies, especially for larger companies.1 The energy sector showed strong results last week but still lags for the year with a 6.5% year-to-date return. Technology and real estate companies continue to lead all sector returns for the year with better than 30% returns.2

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/28/19

 

As we have stated before, all investments have done well in 2019, albeit some better than others! We have seen positive returns in stocks, bonds, oil and gold this year. According to Jason Goepfort of SentimenTrader, this is only the 5th year out of the last 30 years to see all those assets make positive gains. Historically, the S&P 500 Index finished higher over the next 3 months 9 out of 10 times. Bonds and gold were not as consistent with positive returns following such performance.3

Source: SentimenTrader.com, The Year of Everything, October 28, 2019

 

Many market variables came together last week to produce positive returns for stocks, including corporate earnings surprises and continued optimism for a trade deal with China. The market also interpreted new developments on Brexit to mean that a peaceful resolution was possible. The result has meant surging stock prices all over the world as we near all-time highs for U.S. stocks. (Side note: the S&P 500 index closed at a new all-time high while typing this at 3039 on Monday, October 28, 2019). The pattern of sideways movement for the index is being tested to the upside as we speak.

Source; Bespoke Investment Group, The Bespoke Report, October 25, 2019

 

What has changed since May and August that stocks would break their “going nowhere” pattern? Primarily the investor attitude towards a possible trade deal with China. Additionally, we have now seen 40% of companies in the S&P 500 report earnings for the 3rd quarter of 2019. According to John Butters of Factset Insight, 73% of companies that have reported earnings are beating what was forecast by analysts, which is much higher than the five-year average.4 The key question we like to ask is if companies are beating earnings estimates because they have healthy growth or due to lower estimates. Currently it appears that the lower estimates are causing companies to beat expectations. We are expecting the net number of upside earnings surprises will come down as the energy sector releases their earnings in the coming weeks. The energy industry earnings continue to be discussed as company leaders continue to warn that future earnings don’t look favorable.

Source: Factset Insight, S&P 500 Earnings Season Update, John Butters, October 25, 2019

 

Much of the news this coming week will be focused on the Federal Reserve meetings scheduled for Tuesday and Wednesday. We expect to hear on Wednesday whether the Fed will change their target policy for interest rates…again. Brian Wesbury, Chief Economist at First Trust Advisors, notes that the markets show a 90% probability of another rate cut this week.5 Wesbury argues that this rate cut would seem unnecessary by traditional economic standards:

  • Current unemployment is 3.5% (Fed target is anything below 4.2%)
  • Nominal GDP at 5.5% annualized for last two years
  • Money supply growth well above last year’s targets (6.5%)6

However, the Fed is most likely trying to address the uncertainty looming over trade agreements, short-term weakness in manufacturing surveys (tied to trade issues) and the falling rates on longer-term Treasuries which has caused an inverted yield curve in prior months.7 Our investment committee believes that the tremendous amount of negative interest rates across the globe (mentioned in last week’s Sitrep) is also pushing the Fed to act further. Overall, U.S. interest rates remain very low.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/28/19

 

Our investment committee continues to cite the following evidence for market gains into year-end:

  • Accommodative Federal Reserve policy (more on that this week)
  • Favorable interest rates with muted inflation expectations
  • Strong U.S. dollar relative to the rest of the world (despite the last two weeks)
  • Lower taxes for U.S. companies
  • Earnings growth that should rebound with news of trade deal
  • Valuations on U.S. stocks that are above average but not too extended

Our portfolio remains tilted toward large companies with high quality. Our equity positions are conservative and have performed well in 2019. The overall volatility in U.S. stocks has fallen (measured by the VIX – CBOE Volatility Index), which has historically been a bullish indicator for U.S. stocks. Our weekly market snapshot shows that investors are still buying U.S. stocks.

Lastly, we continue to see tremendous opportunities in municipal bonds for clients in taxable accounts. The demand for tax-free income is strong and our managers continue to find high quality bonds with appealing yields. We are conscious of the potential for credit issues in the future with some municipalities, thus we continue to rely on institutional money managers (mutual funds) to find the best long-term opportunities for our clients. It is not uncommon to find portfolios with 3% tax-free yields in the market today.8

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. J.P. Morgan Asset Management, Weekly Economic Update, 10/28/19
2. J.P. Morgan Asset Management, Weekly Economic Update, 10/28/19
3. com, The Year of Everything, 10/28/19
4. Factset Insight, John Butters, S&P 500 Earnings Season Update, 10/25/19
5. First Trust Advisors, Brian Wesbury, Monday Morning Outlook, 10/28/19
6. First Trust Advisors, Brian Wesbury, Monday Morning Outlook, 10/28/19
7. First Trust Advisors, Brian Wesbury, Monday Morning Outlook, 10/28/19
8. Nuveen Investments, Weekly Market Commentary, 10/28/19

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