The “Heat Map”

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 spending is expected to remain healthy as individuals with lower tax rates spend their windfalls.

FED POLICIES

C-

In September, the Federal Reserve raised interest rates for the third time this 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 expectation is for another strong quarter.

EMPLOYMENT

A+

The US economy added 201,000 new jobs in August and the unemployment rate remained below 4%. Additionally, weekly jobless claims fell to their lowest level in over 50 years last week. The job market remains very healthy.

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

A Word on Market Volatility

by Connor Darrell, Head of Investments
It was a difficult few days on Wall Street, and many investors have begun to wonder whether it is time to worry. Volatility has a way of surfacing just when investors are starting to feel comfortable, and it can make sticking to long-term plans exceptionally difficult. It seems like ages ago now, but many of us were in this same position of pondering the death of the bull market as recently as February of this year. But following the market sell-off in early 2018, markets were able to find their footing and eventually (briefly) regain new highs.

The market’s ascent occurred despite a difficult backdrop of escalating trade tensions, rising interest rates, and uncertainty regarding the future of monetary policy and the balance of power in Washington. The U.S. equity market was able to brush these things aside because companies were reporting strong earnings growth, the unemployment rate was near record low levels, and U.S. economic growth was accelerating. All these things (both the favorable and the unfavorable) are still true today. As is typical during long bull runs, the action we have observed over the past few trading days suggests that markets (potentially spooked by a modest but sudden jump in bond yields that occurred last week) are simply re-evaluating the risks we delineated above and their potential impacts on the forward outlook.

Ultimately, we are of the belief that the list of factors supporting markets far outweighs the list of potential concerns at this time, and we anticipate that markets will eventually arrive at the following conclusions:

  • The U.S. economy remains healthy (this is supported by the myriad of economic data we track on a regular basis and reiterated by comments made by Fed Chairman Jerome Powell just last week).
  • Monetary policy, while certainly moving in a restrictive direction, remains accommodative relative to history.
  • Interest rates are creeping up for the right reasons (healthy economic growth).

We anticipate that this bout of volatility will play out much like the last one. Our plan is to “stay the course” and believe clients will be well served to trust in their long-term financial plan. As human beings, we tend to focus on the short term. This is a natural inclination rooted in the “fight or flight” instincts that our ancestors relied upon for survival. The key to successful investing is to put these instincts aside and focus on the long term.

“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 and her guest, Attorney Dennis Pappas from the Law Offices of Vasiliadis Pappas Associates will discuss: “Essential components of an estate plan.”

RELATED VIDEOS: 5-Step Approach to Estate Planning

Estate Planning Series Introduction WATCH NOW

Step 1: Identifying Goals WATCH NOW

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+

Consumer spending is expected to remain healthy as individuals with lower tax rates spend their windfalls.

FED POLICIES

C-

In September, the Federal Reserve raised interest rates for the third time this 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. We will get our first glimpse of Q3 earnings over the next few weeks.

EMPLOYMENT

A+

The US economy added 201,000 new jobs in August and the unemployment rate remained below 4%. Additionally, weekly jobless claims fell to their lowest level in over 50 years last week. The job market remains very healthy.

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, Head of Investments
Stocks and bonds both fell last week as interest rates moved markedly higher. The yield on the 10-Year Treasury note jumped to its highest level since 2011, and now sits at 3.23%. Interestingly, it seemed that the market movements were sparked by a “good news is bad news” type scenario, where Fed Chair Jerome Powell’s comments that the economy is “firing on all cylinders” prompted concerns of an acceleration in the tightening of monetary policy.

Rising Rates are Nothing to Fear
The activity in markets last week was a microcosm of what many market strategists have feared a rising interest rate environment might create; a period of pressure on both stocks and bonds, where both asset classes struggle to generate positive returns and leave investors with nowhere to “hide”. While it is true that rising interest rates may represent headwinds in both stock and bond markets, we believe there is an emerging opportunity to utilize short-term instruments in a way that has not been available to investors in a very long time. If rate increases continue on the schedule that seems to have been hinted at by the Federal Reserve (which has thus far been very effective at telegraphing its future policy changes), the yields available to short-term fixed income investors could be safely north of 3.5% by the end of next year. At these levels, short-term fixed income can provide stability in a portfolio while still preserving an investor’s spending power.

Bond investors should be further comforted by the fact that the yield curve has begun to steepen again.  Historically, an inversion of the yield curve (which occurs when short-term rates move higher than long-term rates) has been a bearish signal for the economy and for markets. However, the yield movements we have observed recently suggest that the probability of yield curve inversion has declined. Investors have not had to grapple with a rising rate environment for quite some time and volatility should be expected moving forward as a result. But there are still reasons to remain optimistic about the forward outlook, and there are tools investors can utilize to help insulate their portfolios from any bumps along the way.