VNFA NEWS

Our team celebrated our VP of Finance & Tax Services last week as she was honored as the Rising Star at the Lehigh Valley Business CFO of the Year Awards. Elizabeth Wilson, CPA was recognized along with seven other financial professionals from non-profit and for-profit businesses at a breakfast ceremony Sept. 11.

READ MORE about the awards and event at lvb.com.

The Numbers & “Heat Map”

THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.

CONSUMER SPENDING

A

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position, and recent GDP data provided further evidence of healthy consumer spending.

FED POLICIES

B+

Our Fed Policies grade remains a B+ after the Federal Reserve opted to cut its interest rate target by 25 bps following last month’s meeting. The cut was widely anticipated by markets, and if history is any representation, it is unlikely to be the last.

BUSINESS PROFITABILITY

B-

With most S&P 500 companies having reported Q2 earnings, the EPS growth rate for the second quarter is close to zero. Despite the weak growth rate, almost 75% of companies have beaten consensus estimates this quarter.

EMPLOYMENT

A

The US economy added 130,000 new jobs in August, below the consensus expectations of analysts. However, despite the lower than expected job creation, there was evidence of an acceleration of wage growth. The labor market continues to look quite healthy.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Despite a tight labor market, we continue to see no signs of an increase in inflation. This bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Following a re-escalation of the US/China trade dispute, we have raised our “international risks” metric back to a 7. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

Quote of the Week

“Grit is that ‘extra something’ that separates the most successful people from the rest. It’s the passion, perseverance, and stamina that we must channel in order to stick with our dreams until they become a reality.” –Travis Bradberry

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Stocks logged their third consecutive week of healthy gains last week, with outperformance rotating toward small caps and value stocks. The shift into value and small cap stocks represented a meaningful change in investor preferences, which have favored large caps and growth stocks for much of the year. Bond investors saw losses as the yield curve steepened and most interest rates moved higher throughout the week. Bond yields were likely supported by stronger than expected retail sales and inflation data.

As far as economic data goes, there continues to be a disparity between measures of businesses and measures of consumers. Consumer data has remained strong as a result of low unemployment, rising wages, and relatively low inflation. However, trade uncertainties have made global businesses apprehensive to invest heavily in new projects, leading to weakening manufacturing activity and lower capital expenditures. In the absence of a trade deal, the U.S. consumer will likely continue to bear the responsibility of keeping economic momentum intact. However, an eventual deal remains our base-case scenario. In the meantime, we continue to advise against attempting to trade around short-term moves driven by speculation surrounding a trade deal. Investors would be well-served by remaining disciplined and diversified in an increasingly uncertain environment.

Oil Markets Disrupted by Attacks in Saudi Arabia
Over the weekend, attacks on Saudi oil assets caused major disruptions to facilities that produce almost six million barrels of oil per day; approximately 5% of the world’s daily oil output. Oil prices have moved higher as a result of the attacks, and U.S. officials have made it clear that they believe Iran to be at fault and that military action remains on the table. Putting aside the concern these types of headlines may instill in us as global citizens, there are a few important things to note from an investment perspective.

First, there is the obvious impact of higher oil prices. Generally speaking, higher oil prices lead to higher costs for everyday consumers. The good news is that global oil production is in a much different place than it was even five or 10 years ago, and the United States now has the ability to make up for shortfalls in global supply.  As a result, it is unlikely that oil prices will be able to spike to levels that might lead economists to worry about their impact on economic activity. For perspective, West Texas Intermediate Crude prices were climbing into the low $60s per barrel as of Monday morning, far lower than the $100+ levels observed as recently as 2014.

Secondly, higher oil prices will likely provide some support for U.S. energy stocks, which have struggled year to date. Energy sector earnings have been lackluster since the precipitous drop in oil prices observed in 2015, and that has made it difficult for many energy companies to meet their profit and revenue targets. The extent to which the U.S. energy sector benefits will likely be a product of how long it takes Saudi Arabia to restore its production back to previous levels, but in the meantime, the United States’ recent investments in energy independence are likely to bear fruit.

In general, oil remains one of the most important basic resources for economic production, but the significance of events like this have declined over the past decade or so as a result of changes to the global supply network as well as advances in technology that have reduced the word’s dependence on oil. These types of events certainly require monitoring, but rarely require a change in portfolio strategy for the average investor.

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.

This week, Laurie welcomes Darlene Pors and Carla Hickey from the Chamber of Commerce Women’s Business Council to discuss: “Women in Business – Opportunities & Events.”

Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.

The Numbers & “Heat Map”

THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.

CONSUMER SPENDING

A

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position, and recent GDP data provided further evidence of healthy consumer spending.

FED POLICIES

B+

Our Fed Policies grade remains a B+ after the Federal Reserve opted to cut its interest rate target by 25 bps following last month’s meeting. The cut was widely anticipated by markets, and if history is any representation, it is unlikely to be the last.

BUSINESS PROFITABILITY

B-

With most S&P 500 companies having reported Q2 earnings, the EPS growth rate for the second quarter is close to zero. Despite the weak growth rate, almost 75% of companies have beaten consensus estimates this quarter.

EMPLOYMENT

A

The US economy added 130,000 new jobs in August, below the consensus expectations of analysts. However, despite the lower than expected job creation, there was evidence of an acceleration of wage growth. The labor market continues to look quite healthy.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Despite a tight labor market, we continue to see no signs of an increase in inflation. This bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Following a re-escalation of the US/China trade dispute, we have raised our “international risks” metric back to a 7. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Markets pushed higher last week despite a weaker than expected August jobs report which revealed a slowdown in hiring but an acceleration in wage growth. Combined, these two trends would suggest that fewer people were put to work during the month, but those that were received higher wages. Manufacturing data also released during the week suggested that U.S. manufacturing activity dropped into contraction for the first time in seven years, likely as a result of the ongoing uncertainty being created by the U.S.-China trade war. Manufacturing activity around the globe has been negatively impacted by trade policy, and it seemed only a matter of time before the U.S. manufacturing sector began to feel those same effects. None of the above news came as a major surprise to investors however, and markets were not significantly impacted. Instead, the confirmation from Chinese negotiators that the U.S. and China were scheduled to hold “serious” talks during October seemed to support investor optimism.

Divergence in the “Soft” Data
Economists often classify economic data into two different categories. Hard data refers to real numbers that are directly measurable, such as GDP growth. Soft data refers to measurements that are derived from survey data, such as consumer confidence. Lately, economists have observed a divergence in the soft data coming from businesses and consumers. For businesses, confidence has been declining as a result of the weakening global growth rates and the uncertainty over the impacts of disruptions to global trade. However, consumers have remained rather optimistic as a result of low unemployment, rising wage growth, and low inflation. Economic demand in the U.S. is driven by both businesses and consumers, but consumers make up a larger component (about 70%). As such, the consumer is in a better position to support the economy moving forward, and the resiliency of consumer confidence remains a key factor in keeping the economic expansion intact.