Daily Archives: May 8, 2018

The Markets This Week

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by Connor Darrell, Head of Investments
Both stock and bond markets trended downward last week, until Friday’s jobs report sparked a stock market rally. The Department of Labor reported that employers added 164,000 new jobs in April, and that the unemployment rate currently stands at 3.9%. This was the first unemployment reading below 4% since 2000.

Additionally, there are more than six million unfilled job openings throughout the economy; close to an all-time record. However, despite the continued imbalance in the supply and demand for labor, wage growth has remained slightly below expectations. Wage growth is one of the last pieces of the puzzle, and because of its potential connection to inflation, will be watched closely by the Fed as it steadies its march toward normalization.

A Wacky Earnings Season
Active traders often try to take advantage of earnings calls as an opportunity to buy or sell a stock ahead of its earnings report.  It’s a risky proposition, and one that we do not recommend in the current environment. Per Factset, 81% of S&P 500 companies have reported Q1 earnings in excess of consensus estimates, and overall earnings growth has been over 24%; the highest rate in seven and a half years. Even so, we have witnessed dozens of companies report earnings beats, only to sell off meaningfully during the following trading session. It seems the market has lofty expectations for further growth, and companies that do not raise their forward guidance to meet those expectations are being punished. As we continue to progress deeper into the economic cycle, the heavy emphasis on forward guidance rather than past results is likely to persist.

According to research from Wells Fargo, earnings growth for Q1 would be closer to 7% in the absence of tax reform, and once we reach 2019, year-over-year comparisons will not benefit from the tax reform boost. Add this reality to the confluence of risks that the market has begun to acknowledge rather than ignore, and it becomes a little bit easier to understand why markets aren’t quite ready to break out the champagne to celebrate a successful earnings season.

As the market continues to trend sideways with higher levels of volatility, asset allocation and diversification become even more important. Periods like these are the reason we diversify in the first place.

The Numbers & “Heat Map”

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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-

The Federal Reserve increased the Fed Funds Rate by 0.25% in March, and is expected to implement at least 2 more hikes this year. Rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets.

BUSINESS PROFITABILITY

A

Per Factset, with 81% of S&P 500 companies having reported Q1 earnings, the average earnings growth rate has been over 24%. This is the highest rate since 2010.

EMPLOYMENT

A+

Last week’s jobs report indicated that the unemployment rate has dropped below 4% for the first time since 2000. Additionally, there are over 6 million unfilled job openings throughout the economy; close to an all-time record.

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.

Did You Know…?

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As an independent firm we focus on putting the best interests of our clients above all else. It is important that our industry maintain standards for transparency and ethics. The latest example of this is the SEC Action Looking for Individuals (SALI). The searchable database will help identify registered and unregistered individuals who have been parties to past SEC enforcement actions and against whom federal courts have entered judgments or the SEC has issued orders. Click here to read the SEC announcement.

“Your Financial Choices”

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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 , James J. Ruggiero Jr., Esq. AEP®, Managing Partner at Ruggiero Law Offices, will discuss: “IRA TRUSTS”

Laurie will take your calls on this or other topics. This show will be broadcast at the regular time WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.