Daily Archives: July 17, 2018

The Number & “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-

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.

BUSINESS PROFITABILITY

A

Q1 Earnings were very strong, with US companies reporting YoY earnings growth of 25%. Q2 earnings season kick into gear this month.

EMPLOYMENT

A+

The US economy added 213,000 new jobs in June, and the labor force participation rate is now on the rise. Jobs are available for those who want them.

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

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by Connor Darrell, Head of Investments
The last few weeks have finally brought some stability back to markets, with the S&P 500 now up 5.86% year to date. Q2 earnings season begins this week, and investors are expecting more strong growth in corporate profits amid a strong economic backdrop. On the bond side, yields remained relatively stable last week, though the trend of yield curve flattening remains firmly intact.

Now May Be a Great Time to Rebalance
Since emerging from the depths of the financial crisis in early 2009, the S&P 500 has produced a total return of over 360%. Disciplined investors who stuck through the turmoil of the great recession and were able to maintain exposure to equities have been richly rewarded for their patience. However, while the US economy remains on firm footing and the risk of recession in the near future remains relatively low, the next 10 years for investors are likely to look very different from the last 10 years. Investing is about achieving goals, and it is likely that the market’s strength over the past several years has put many investors ahead of schedule in terms of their long-term plan. Additionally, that strength in equity markets has likely pushed equity allocations toward the upper end of many investors’ target range, which can lead to a riskier portfolio. Nobody will ring a bell announcing when the current market cycle finally comes to an end, and the official “top” of the market may not be officially identified for quite some time after it occurs. But we can say with a reasonably high degree of confidence that we are much closer to the top than the bottom.

All of the above suggests that it may be prudent for investors to take a step back, evaluate their long-term asset allocation targets, and rebalance to ensure that their portfolio is properly tuned for the road ahead. 2018 has already presented investors with a number of new risks to consider and managing these risks will become increasingly difficult as the environment becomes less accommodating to the complacent investor.