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

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position.

FED POLICIES

C+

Following its March meeting, the Federal Reserve signaled to markets that it may not hike interest rates during 2019, and plans to halt its balance sheet reductions. The Fed’s future actions will remain data dependent, but the contractionary policies that have dominated the last two years appear to be on pause.

BUSINESS PROFITABILITY

B-

As was anticipated, first quarter earnings revealed a tapering of growth. According to Facset, the blended earnings decline for Q1 2019 is -0.4% (with 98% of S&P 500 companies having reported). However, more than 75% of these companies have reported earnings that were higher than consensus estimates.

EMPLOYMENT

A

The US economy added 263,000 new jobs in April, helping to push the unemployment rate to its lowest level in over 50 years. We have now observed 100 consecutive months of job growth in the United States.

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

7

We have raised our international risks rating to a 7 as a result of rising tensions between the US and Iran, as well as the recent decision by the Trump administration to impose a sales ban on Chinese tech company Huawei. The ban is representative of the risks associated with the growing technology rivalry between the US and China.

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 slid lower last week as concerns over trade policy remained top of mind for investors. On Thursday, President Trump announced that the United States would begin assessing a 5% tariff on all U.S. imports from Mexico unless the Mexican government began taking a more active role in reducing the flow of Central American migrants seeking asylum in the United States. The news pushed markets into “risk-off” mode and stoked concerns that major North American supply chains could be materially disrupted. The U.S. 10-year treasury reached its lowest level since September of 2017, which resulted in a deeper inversion of the yield curve and a strong week for bonds. 

Watching the Economic Data
Amid all of the uncertainty permeating through markets regarding trade policy and its eventual impact on global economic growth, the Fed has continued to express its intention to remain “data dependent.” This week, markets and policymakers will have access to updated PMI manufacturing data, which has been trending lower for several months. Friday will also bring the monthly jobs report, which has been consistently strong. Overall, while economic data releases have been overshadowed by trade negotiations in terms of news coverage, they are arguably just as (if not, more) important because they provide us with tangible evidence of how the economy might be weathering the geopolitical uncertainty. And as we continue to march along toward the 11th year of the current cycle, it will be increasingly important to watch the economic data for signs of an inflection point.

“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.

Questions can be submitted live on air by calling 610-755-8810 or sent in online anytime at yourfinancialchoices.com/contact-laurie 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

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position, and recent retail sales figures surprised to the upside.

FED POLICIES

C+

Following its March meeting, the Federal Reserve signaled to markets that it may not hike interest rates during 2019, and plans to halt its balance sheet reductions. The Fed’s future actions will remain data dependent, but the contractionary policies that have dominated the last two years appear to be on pause.

BUSINESS PROFITABILITY

B-

Corporate earnings remain strong, but we anticipate earnings growth will taper off in 2019. According toFacset, the expected earnings growth rate for S&P 500 companies during 2019 is around 4%. This is below the long-term average for the current cycle.

EMPLOYMENT

A

The US economy added 263,000 new jobs in April, helping to push the unemployment rate to its lowest level in over 50 years. We have now observed 100 consecutive months of job growth in the United States.

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

7

We have raised our international risks rating to a 7 as a result of rising tensions between the US and Iran, as well as the recent decision by the Trump administration to impose a sales ban on Chinese tech company Huawei. The ban is representative of the risks associated with the growing technology rivalry between the US and China.

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

Geopolitical Update: China & Iran Represent Risks
We have raised our “International Risks” rating to a 7 from a 5 following recent developments in the Middle East and escalating tensions between the United States and China. We continue to stress that geopolitical events tend to have a smaller impact on markets than fundamental economic factors such as GDP, corporate earnings, and consumer confidence, but believe that recent news flow warrants investors’ close attention.

Earlier this month, the Trump administration ordered the deployment of significant military assets to the Persian Gulf, citing intelligence that suggested a rising probability of Iranian attacks on U.S. interests in the region. The Iranian economy is under significant pressure as a result of U.S. sanctions, and there appears to be growing concern within the Iranian government that Donald Trump will be re-elected in 2020. We have already seen multiple instances over the past few weeks where Saudi oil assets were sabotaged, and the general consensus in the intelligence community is that these attacks were carried out by Yemeni rebels on behalf of Iran. U.S.-Iranian relations are at their weakest level in years, with Secretary of State Mike Pompeo and Iranian Foreign Minister Mohammad Javad Zarif never having directly spoken to one another. The lack of a direct channel of communications between the two chief diplomats underscores a growing concern that any potential confrontation may be blown out of proportion and escalate quickly. Any meaningful escalation of tensions in the region would have the potential to de-stabilize oil prices (20% of the world’s oil travels through the Strait of Hormuz on its way to end markets) and further strain the United States’ relationship with China.

The trade negotiations between the U.S. and China have been thoroughly explored in virtually all media outlets, as well as in previous iterations of The Weekly Commentary, but there is another dimension to the discussions which extends beyond trade deficits and trade surpluses; the race to 5G. It has become increasingly apparent that the United States government views the race to establishing and dominating the world’s first 5G (fifth generation) cellular network technology grid as a matter of national security. First adopters of 5G technology are expected to sustain a meaningful long-term competitive advantage, and China is heavily focused on pushing to challenge the United States as the dominant force in the evolution of the world wide web. China’s approach to controlling information on the internet is vastly different from the openness championed by traditional American values, and in many ways, the race to 5G represents a philosophical battleground over the flow of information; one that has continued to escalate in recent weeks.

Shortly after the most recent round of trade discussions fell through, President Trump announced a ban on Chinese smartphone manufacturer Huawei. The ban blocks U.S. companies from doing business with Huawei, and essentially prevents it from accessing key inputs to its manufacturing process (which are produced by American companies). We see this decision as a clear and meaningful step to explicitly hamper China’s advancement in 5G technology and keep U.S. companies on a level playing field (Chinese companies receive direct support from the Communist-led government).  From an investor perspective, a meaningful disruption to the supply chain of technology equipment or additional bans would have the potential to cause volatility in equity markets as companies’ revenue streams are impacted. Even if a trade deal is reached within the next several months, the complexities of the technological rivalry between the two countries is likely to persist and will represent potential challenges for global companies which may be caught in the crosshairs of further policy action. Furthermore, a prolonged period where tariffs are imposed on Chinese goods would likely have a negative impact on economic growth. Recent research published by the New York Fed estimated that the newest round of tariffs could cost the average American household $831 per year. The focus on China and trade has the potential to draw the market’s focus further away from fundamentals and toward the unpredictability of the president’s Twitter feed. Such an environment will be very difficult to navigate for market timers and short-term traders.  In our view, the best defense for this type of uncertainty is broad diversification and discipline. We will continue to utilize The Weekly Commentary to share our thoughts on new developments as they unfold.