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

We have downgraded our consumer spending grade to A from A+ following weaker than expected December retail sales data and some declines in consumer confidence surveys. However, monthly data can be volatile and we still believe that the US consumer is in a healthy position.

FED POLICIES

C-

The Federal Reserve implemented four interest rate hikes during 2018, and while the rate hike cycle appears to be on pause for now, rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets.

BUSINESS PROFITABILITY

B+

Corporate earnings remain strong, but we anticipate earnings growth will taper off in 2019. We are also beginning to see a higher number of companies reducing forward earnings guidance, a sign that earnings growth may have reached its peak in 2018.

EMPLOYMENT

A

The US economy added just 20,000 new jobs in February, which was far less than expected. This was the weakest number since 2017, but job gains from both December and January were revised upwards. Despite the weak report, the labor market remains one of the strongest components of the economic backdrop at this time.

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.




The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Equities posted healthy gains for the week despite a mixed bag of economic data and tempering expectations for Q1 2019 earnings growth. Market optimism seemed to be bolstered by reports from Chinese media outlets of progress in the U.S./China trade negotiations, as well as an easing of concerns over Brexit negotiations.

On the economic front, the housing and manufacturing sectors produced results that fell below consensus estimates, continuing a recent pattern of weakness. New home sales dropped by almost 7% in January despite the recent decline in mortgage rates easing affordability. Some of the weakness can likely be attributed to the government shutdown and poor Q4 equity market performance which may have eroded the confidence of potential buyers. On the positive side, January retail sales bounced back after a poor December reading and a preliminary gauge of consumer sentiment came in higher than expected. The mixed signals from economic data are typical of a late cycle environment.

Earnings and Prices Have Diverged
Equity investors have had a difficult time over the past 15 months. 2018 was characterized by very strong earnings growth and a healthy economy, yet the stock market performed poorly. This led to P/E multiples (where “P” refers to the price of stocks and “E” refers to corporate earnings) contracting as prices declined and earnings rose. Thus far in 2019, the opposite has been the case. The expectations for corporate earnings growth have deteriorated as global economic growth has subsided, yet stock prices have pushed higher amid a shift in rhetoric from the Federal Reserve and an evaporation of pessimism following December’s market bottom.

Over the long-term, earnings growth is a key input to determining the trajectory of the stock market, but throughout 2018 and 2019, the two have diverged. In order to justify continued multiple expansion, markets will likely require the support of some positive developments on geopolitical issues which have been a major source of uncertainty not only for investors, but also for business leaders. With last week’s news that British lawmakers voted against leaving the European Union without a deal in place, some of that uncertainty was lifted.  But the darkest cloud remains the ongoing trade saga between the United States and China. An eventual agreement that materially addresses the key concerns of U.S. negotiators and business leaders (who have had a difficult time making long-term investment decisions as a result of the uncertainty) could be the catalyst needed to move the ceiling for equities higher.

“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: “Elements of Financial Planning.” Laurie will take your calls on this or other topics 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.

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

We have downgraded our consumer spending grade to A from A+ following weaker than expected December retail sales data and some declines in consumer confidence surveys. However, monthly data can be volatile and we still believe that the US consumer is in a healthy position.

FED POLICIES

C-

The Federal Reserve implemented four interest rate hikes during 2018, and while the rate hike cycle appears to be on pause for now, rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets.

BUSINESS PROFITABILITY

B+

Corporate earnings remain strong, but we anticipate earnings growth will taper off in 2019. We are also beginning to see a higher number of companies reducing forward earnings guidance, a sign that earnings growth may have reached its peak in 2018.

EMPLOYMENT

A

The US economy added just 20,000 new jobs in February, which was far less than expected. This was the weakest number since 2017, but job gains from both December and January were revised upwards. Despite the weak report, the labor market remains one of the strongest components of the economic backdrop at this time.

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.




The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
The major global equity indexes posted their worst week of the year as investor sentiment was impacted by further evidence of a slowdown in global economic activity. In the U.S., the monthly jobs number came in far lower than expected, though there is reason to believe that the report was heavily influenced by weather-related factors. In Europe, the European Central Bank (ECB) announced that it intended to inject further liquidity into the European banking system in an effort to curtail the negative impact that trade tensions and geopolitical concerns have had on economic growth. Lastly, the Chinese government seemed to unsettle markets when it announced a new fiscal stimulus program aimed at increasing activity in its slowing manufacturing sector. Bonds climbed higher as rates fell amid the flurry of new economic data and policy developments. 

The Pendulum Continues to Swing
At the beginning of December, the S&P 500 was trading right around the 2,790 level before negative sentiment drove the index to the brink of bear market territory. After a sharp reversal around Christmas and one of the strongest starts to a year in decades, the turmoil from December felt like a faded memory. But last week brought with it five consecutive days of negative returns for equity markets, leaving many investors wondering where we go from here 

It’s important to remember that market performance tends to track earnings over the long-term, and earnings are largely driven by economic fundamentals. The fact is that economic fundamentals simply do not reverse course so significantly in such a short period of time. As such, it makes sense to inquire as to whether the market was too pessimistic during December or too optimistic during January and February? The answer is probably yes on both fronts.

Given the heightened uncertainty and slower growth rates being observed around the globe (as compared to 2017 levels), the current fair value for the market is likely somewhere in between December’s bottom and March’s peak. The market seems to have attributed much of the recent slowdown in China to continuing trade tensions with the United States, while in Europe, the uncertainty of the Brexit situation continues to impact business investment and economic activity. Clarity on both of these issues is likely to be provided before the end of 2019, and this may allow economic growth to reaccelerate by the second half of the year. But until then, the pendulum may keep swinging back and forth with markets stuck in a bounded trading range. For investors, this is a period where patience and discipline will be essential. We continue to favor a disciplined approach to tactical rebalancing rather than attempting to time entry and exit points.