by Connor Darrell, Head of Investments
The stock market continued to brush off the ever-growing list of political headlines on its way to another positive week. The S&P 500 climbed 0.88%, while international stocks bounced back from a turbulent month, posting strong gains as well. Last week also brought further flattening of the yield curve, with the yield on the 30-Year Treasury dropping below 3%.

On Wednesday 8/22, the current bull market officially became the longest on record, which prompted a litany of columns and conversations dedicated to trying to hypothesize when it will finally come to an end. However, the age of a bull market really has no predictive value in determining whether or not it can endure, and we continue to instruct clients to focus on the core foundations of the economy (including the “heat map”), which continue to suggest that a general aura of optimism is justified.

It Still Makes Sense to be Globally Diversified
It is no secret that international equities have underperformed their U.S. counterparts in 2018, and the volatility has caused some investors to question the merits of holding a globally diversified equity portfolio. While much of the uncertainty has been due to a weakening macro backdrop in Europe (as well as the currency crisis in Turkey), it should be noted that sector concentrations have also played a part. The S&P 500 has been bolstered by the performance of fast growing technology stocks, which have outperformed by a substantial margin in comparison to the overall market. The MSCI EAFE (a commonly followed benchmark of international stocks) on the other hand, has not benefitted from the same tailwinds due to its different sector/industry weightings (see chart right).

As this has played out over the past several years, the valuation “gap” between U.S. and international equities has expanded to its widest margin in more than 15 years (see chart below).

Valuations are a notoriously ineffective market timing mechanism but have been historically very helpful in predicting long-term variations in relative performance across markets. It will be interesting to watch this dynamic moving forward, as the U.S. inches closer and closer to the theoretical “inflection point”, where monetary policy tightens enough to become a meaningful headwind to market expansion. Internationally, Central Banks are significantly behind in their tightening cycles, and are only just beginning to contemplate adjusting the “easy money” policies of the last decade.

by Connor Darrell, Head of Investments
Despite a bumpy ride mid-week, U.S. stocks managed to push higher on the heels of a strong Thursday rally. Globally, markets remained jumpy amid a softening economic growth outlook and lingering concerns over instability in the Turkish financial system.

While foreign economies have struggled to gain momentum, the U.S. has been able to break the barrier and establish a more sustained period of economic strength. With two solid quarters of GDP growth behind us, many investors are looking for insights into whether that growth momentum can be carried further; and for how long. One potential window was opened last week with reports of strong retail sales growth (+0.5%), which was further demonstrated in Walmart’s quarterly earnings release. The country’s largest “brick and mortar” retailer posted its best sales growth in over a decade, suggesting that the U.S. consumer is still in a strong position to help keep the momentum going.

Strong Momentum Can Shift Expectations
While the strength of the U.S. economy should help to alleviate any concerns that the next recession will occur in the near future, it doesn’t preclude us from experiencing periods of market weakness in the meantime. We have discussed in the past that the global investment landscape looks quite a bit different now than it did a year or so ago, and that there are more risks that threaten to bubble up and cause disruption in markets. The currency crisis in Turkey is but one example of the types of obstacles markets may face as they continue to scrape higher.

But another potential “obstacle” is the shifting of investor expectations. Markets are naturally forward-looking instruments, in that the price of any given security is determined by the aggregate of investors’ expectations of its future growth opportunities. As companies continue to post strong profit numbers and investors keep hearing about how great the economy is, the natural result will be for them to raise their expectations of future performance. And it is at the point where expectations meet reality that markets can become a little unstable. Often, markets react more to relative changes than to whether something is “good” or “bad” on a standalone basis. In other words, the U.S. economy may remain “strong” but if it fails to keep pace with rising expectations, the market may not react as positively as might be expected. As the U.S. economy keeps humming along, investors may run the risk of setting their expectations too high and would be well advised to maintain a more balanced, pragmatic approach to portfolio construction.