The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
After a brief bump following the mid-term elections, markets have struggled to maintain their footing over the past couple of weeks. That trend continued last week with the S&P 500 sliding down 1.54%. International developed markets followed suit, although the much-maligned emerging markets equity index managed a positive gain. The bond market benefitted from the volatility in equity markets as well as some dovish comments from Atlanta Fed President Raphael Bostic (a member of the interest rate setting FOMC chaired by Jerome Powell), who stated at a conference in Madrid that he does not think “we are too far from a neutral policy.” The comment suggested that fewer rate hikes may be necessary and was somewhat contradictory to the statement Jerome Powell made back in October that prompted a surge in bond yields. Ultimately, investors should continue to expect that the Federal Reserve will remain “data dependent” and will be very clear in communicating its intentions to markets.

Corporate Earnings Have Been Strong, But May be Poised to Taper Off
On a year-over-year basis, Q3 earnings growth among S&P 500 companies is poised to reach its highest level since 2010. About half of that growth can be credited to tax reform, which decreased the tax burden on corporations and enabled them to report higher profits, but the other major contributing factor has been the strength of the U.S. consumer. However, despite the robust earnings growth that has been reported by U.S. companies, the equity market has failed to push meaningfully higher in 2018. This can be partially explained by the tendency for markets to be more concerned with the future rate of change of earnings, rather than the absolute numbers themselves. As the year-over-year benefits of tax reform disappear in Q1 of next year, consumers will take on the bulk of the burden in carrying earnings growth forward, and the bottom line is that earnings growth is likely to decelerate. The uncertainty surrounding how much earnings may decelerate is likely a contributing factor to some of the volatility we are observing in equity markets. We continue to believe that the economic environment is conducive to further gains, but caution that returns moving forward will be far less exciting than what investors have experienced over the past several years.

“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 will not be live on the air. Instead WDIY will air a recorded “Your Financial Choices” show. Questions submitted via yourfinancialchoices.com will be addressed on the next lives show – November 28.

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

VNFA In The Community

You’re Invited!
Join in our effort to support local children this holiday season. We’re having a WRAPPING PARTY on November 27, 11 a.m. to 1 p.m. at our Bethlehem headquarters.

You’re invited to stop by with Holiday Hope Chest donations and to help us wrap our shoe boxes. If you can’t join us, you can sponsor a Holiday Hope Chest by way of the Volunteer Center of the Lehigh Valley’s #GivingTuesday campaign. WHAT ARE HOLIDAY HOPE CHESTS? WHAT GIFTS CAN I CONTRIBUTE?

Light refreshments will be provided. Please RSVP to Judianne Harris by Tuesday, November 20.

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

US ECONOMIC HEAT MAP
The health of the US 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+

Consumer confidence is near all time highs with recent tax reform providing further support. We are anticipating a strong holiday shopping season.

FED POLICIES

C-

The Federal Reserve is expected to raise interest rates one more time before the end of the year. Rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets.

BUSINESS PROFITABILITY

A

Factset is reporting a blended earnings growth rate of 20% YoY for the 2nd quarter of 2018. Tax reform has played a major role, but the strength of the US consumer is boosting corporate profits as well. Q3 earnings season is now underway, and the results reported thus far suggest a continuation of that trend.

EMPLOYMENT

A+

The US economy added 255,000 new jobs in October, significantly more than the consensus forecast. For six months now, there have been more job openings available in the economy than there are unemployed workers to fill them.

INFLATION

B

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but we see the potential for an increase moving forward. This metric deserves our attention.

OTHER CONCERNS

INTERNATIONAL RISKS

5

The above ratings assume no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.

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

“What Is A Veteran? A ‘Veteran’ – whether active duty, discharged, retired, or reserve – is someone who, at one point in his/her life, wrote a blank check made payable to ‘The United States of America,’ for an amount of ‘up to, and including his/her life.’” – Unknown

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Aside from a few “upsets” in individual races, there were no major surprises in the results of the U.S. midterm elections last Tuesday. Democrats managed to take control of the House of Representatives with Republicans maintaining control of the Senate. The initial reaction from markets was positive as the uncertainty surrounding the election results was lifted, although some of those gains were given up during Friday’s trading session. All in all, the U.S. equity market (as measured by the S&P 500) gained 2.21%, with international markets unable to keep pace. Bonds traded relatively flat as interest rates were largely unchanged following the Fed’s decision to stand pat at its November meeting. However, most market forecasters expect the Fed to implement one more rate hike before the end of the year.

Wages on the Rise
Earlier this month, the October jobs report came in much stronger than many expected (255,000 new jobs vs. the consensus forecast of 188,000), but the number that caught Wall Street’s attention was the change in Average Hourly Earnings (AHE). AHE rose 3.14% year over year, the first time throughout this entire economic expansion that AHE growth exceeded 3%. For more than six months now, there have been more job openings available in the economy than there are unemployed workers. The logical consequence is that employers need to offer prospective employees more money in order to entice them to join their company as opposed to competitors, and it appears that the wage growth numbers are finally beginning to reflect that reality. Wage growth is an important contributor to late cycle inflation, which will be top of mind for many market strategists, as well as the Federal Reserve, over the next few months.

“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 will discuss Social Security Considerations.

VIDEO: Your Financial Choices October Recap – Spend 2 minutes with Laurie to review her top takeaways from October and a preview of this month’s show topics lined up for Your Financial Choices. WATCH NOW

Laurie will take your calls at 610-758-8810 during the live show, or via yourfinancialchoices.com. Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.

Valley National News

We are pleased to welcome Christopher Popp, CPA, MST to the team as Senior Tax Accountant.

Chris is one of 10 licensed tax professionals at Valley National (8 CPAs and 2 EAs). He will work out of Valley National’s Bethlehem headquarters as part of the tax services team, preparing and reviewing returns as well as assisting clients with tax strategies and financial planning.

Chris is a Certified Public Accountant (CPA) with more than 25 years of experience. He has a bachelor’s degree in Accounting from Rutgers University and a master’s in Taxation from Seton Hall University. Chris is also a Pennsylvania licensed life insurance producer.

“Our one-stop service model allows clients to have the peace of mind that their financial goals are being managed by one trusted team and Chris is an excellent addition to that team,” said Matthew Petrozelli, Chief Executive Officer. “His knowledge about tax and accounting will be valuable for clients not only during tax preparation season but also year-round in planning for long-term goals.”

Chris resides in Wind Gap. He enjoys family time with his three daughters, reading, golf, soccer and gymnastics.

Chris can be reached at cpopp@valleynationalgroup.com or at 610-868-9000 x 115