Saturday, September 1, 2018

September 2018


Earnings Driven Market Rise

Despite concerns over trade wars, the Mueller investigation, rising rates and a divisive Supreme Court nomination process, U.S. stocks sailed to the best Q3 since 2013 with the SPX gaining 7.2%.

No summer doldrums this year; DJIA + 7% year to date, SPX + 9%, and Nasdaq +16%. Sure effects of +20% corporate profits, low inflation at 2%, unemployment at 3.9%, Q2 GDP +4.2 %. Combined with record business confidence helped us reach new highs for the 3 major indices.

Lower taxes, lower regulation, rising capital spending, record share repurchases, and record dividend payouts are the wind behind this market run.

U.S. 10-year notes yield 3.05% up from 2.43% on Jan 1, 2018. The rise in both long and short-term rates put pressure on most bond portfolios. Two-year notes now yield 2.81%. The yield curve is flattening but still has 24 basis points to go.

Crude oil as measured by WTI finished +21% YTD at $73.25. Foreign markets continue to lag in 2018 as do gold and most commodities. Mexico +3.8 %, Russia +1.7%, Taiwan +4.1% and France +0.6% are positive. Big losers include 
South Africa -23%, Brazil -16.5 %, Germany -9.9%, China -10% and India -8%.

We are experiencing a U.S. bull market of epic duration, which is earnings driven. A business-friendly administration in Washington D.C. helps as well.

Looking at the balance of 2018, positive returns over the past 9 months pre-sage more gains if history is any guide.

On Oct. 1, 2018 the Administration struck a trade agreement with Canada. North American trade terms have now improved for U.S. workers and the U.S. economy, with Mexico on board as well. Europe is still negotiating on trade, South Korea has a trade deal, with Japan not far behind.

The U.S. is finally self-sufficient in energy and we are the production leader in the world. Additionally, we lead in technology, defense and biotechnology.

Through Aug. 31, the S&P 500 has outperformed international stocks. As measured by the MSCI World ex USA Index, over the past one, three, five, 10, 15, 20, 25, 30, 35, 40 and 45-year periods, according to AJO, an institutional investment manager, quoted in the WSJ.

This is a remarkable statistic.
Between 1976-1986 however, U.S. stocks lagged by 6.2% annually. 
Between 1997-2007, U.S. stocks lagged by 3.1%.

Investing overseas and in fixed income has been very tricky this market cycle.  The Chinese are growing faster in GDP terms at +6%, but the U.S. has a larger GDP, even with one billion fewer citizens.

The Chinese market is down year to date. Investors major concern is a trade war with the U.S.

China is now attempting to paint the U.S. as a" bad trade actor" but they have stolen our patents and technology for decades. They force U.S. companies in China to partner with majority Chinese investors for the purpose of technology transfer. They subsidize state industries and dump their surplus capacity on world markets. They are being called to follow WTO rules and lower their domestic tariffs on our imports. They import 5x more into the U.S. than we import into China. I believe they will see the light of our arguments and accommodate President Trump’s demands. They need our markets more than we need their markets.

A new earnings season is upon us and we expect it will be excellent. 2018 will likely see +20% corporate profit growth over the $131.98 level of 2017. Growth stocks have out run value stocks again in 2018. The SPX is expected to report $162 for 2018 and $173 in 2019 according to Yardini Research, Inc. At 2923 that puts the SPX at 16.9x next year's earnings. This is not too high in this interest rate environment. Preliminary estimates are between $185 and $195 for 2020.

As we await election results in November, it would take a win for Democrats in both Houses to upend the outlook.

As we enter into the strongest six months of the calendar year for stocks the Bull still reigns.

We wish you a festive fall season.

Portfolio Review? Please let us know.


Disclaimer: These stock market observations are confidential and proprietary. They are for informational purposes only and are not intended to be used, and may not be used, as investment, legal, accounting, tax, or other advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the information herein is no longer current or accurate. These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests in any investment vehicles managed by CFA or an associated person or entity, or to provide investment advisory services.

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