All of us at Valley National wish you a Happy 4th of July. Our offices will close with the markets at 1 p.m. on Tuesday, July 3 and remain closed in observance of Independence Day on July 4. Normal office hours will resume on Thursday, July 5.
Daily Archives: July 2, 2018
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.
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CONSUMER SPENDING |
A+ |
Consumer spending is expected to remain healthy as individuals with lower tax rates spend their windfalls. |
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FED POLICIES |
C- |
Following its June meeting, the Federal Reserve implemented the second rate hike of 2018, and suggested that two more hikes should be expected before year-end. Rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets. |
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BUSINESS PROFITABILITY |
A |
Q1 Earnings were very strong, with US companies reporting YoY earnings growth of 25%. |
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EMPLOYMENT |
A+ |
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. |
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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. |
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OTHER CONCERNS |
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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…?
FROM THE HEADLINES
Source: Associated Press, June 25, 2018
Pennsylvania OKs new college saving grants for newborns
HARRISBURG, Pa. (AP) — Pennsylvania is starting a program proposed by state Treasurer Joe Torsella to provide college savings accounts for newborns, beginning with a $100 grant.
Torsella said Monday the program will be open to any child starting next year who is a Pennsylvania resident at birth or adopted by a Pennsylvania family. Parents will be notified about the account set up for them.
Gov. Tom Wolf signed the program into law Friday.
It’s projected at a $14 million annual cost for an average of 140,000 births per year and Torsella says it can be financed by donations and surpluses in Pennsylvania’s existing college savings program.
The Treasury Department will invest the money and income it earns can be spent on a range of post-high-school education needs until the child reaches age 29.
Quote of the Week
“Our greatest happiness does not depend on the condition of life in which chance has placed us, but is always the result of a good conscience, good health, occupation, and freedom in all just pursuits.” – Thomas Jefferson
The Markets This Week
by Connor Darrell, Head of Investments
After a bumpy start to the week, markets ended the first half of the year on a high note, with financial stocks leading equity indices higher. The Federal Reserve’s annual stress tests revealed that banks appear to be on sound financial footing, and bank stocks rallied on the news. However, Friday’s rally could not erase losses from earlier in the week, as global equities traded lower amid ongoing trade tensions.
As geopolitics and trade have dominated headlines in recent months, U.S. small cap stocks have managed meaningful outperformance due to their more domestic focus. The Russell 2000, which measures the returns on a broad basket of US small cap stocks, has outperformed the S&P 500 by about 5% year-to-date.
Tech is Taking Over, and It’s Given the S&P 500 a Serious Boost
As technology has become an increasingly important part of our daily lives, it has also become an increasingly dominant influence of stock market returns. The S&P 500 currently has a total market capitalization of about $23 trillion, and technology stocks make up about 23% of that number. The index’s four largest constituents (Apple, Microsoft, Amazon, and Facebook) are all deeply entrenched in the tech community. Those four stocks make up over 12% of the index, up from 5.9% just five years ago. The rapid rise of the so-called “FAANG” stocks (which include Facebook, Amazon, and Apple along with Netflix and Google) has been a major driver of S&P 500 performance over the last several years.
The proliferation of passive investing in recent years has largely coincided with tech’s dominance, and it begs the question as to whether there are risks lurking beneath the surface. Portfolio managers often seek to minimize the risk that any one (or four) stock(s) dominate the risk profile of a portfolio. Historical data suggests that the average annualized volatility of a single stock is more than double that of a typical diversified equity portfolio.1 As a result, portfolio managers will tend to underweight the largest stocks in an index in an attempt to more efficiently diversify risk across different stocks. As these tech giants have grown into tech behemoths, that underweight has been a difficult hurdle for stock pickers to overcome.
Passive investing provides a myriad of benefits to investors, including low fees, tax efficiency, and better discipline, but investors need to be aware of what’s in their index of choice. The significant boost that the S&P 500 has gotten from the successes of its largest constituents could just as easily go the other way if the market decides that valuations in those stocks have gotten too stretched. [1] Source: FactSet, Fidelity Investments (2017)
What We’re Reading
A collection of links to articles and idea our VNFA staff found interesting and informative recently.
Stronger Than Steel: Forging A Rust Belt Renaissance (by Jeffrey A. Parks)
Treasury, IRS reveal a postcard-size form to file your taxes (CNBC)