December 2018

What's Next?

After a stellar earning season in Q3, +25.9% year over year, 78% of the S&P 500 companies beat estimates according to FactSet. The market may have made a double bottom on Nov. 23 after the earlier Oct. 29 low. The SPX has gained 3.2% through Nov. 30 while the Russell 2000 was flat and the NYSE index was down 2.7%. The iShares ETF-AGG- representing the Core U.S. bond index is down over 4% this year. Oil dropped 20% from the early October peak with global recession fears and oversupply the culprits. Foreign stock markets swooned through Nov. 30; Germany -18.7 %, Japan -7.7%, China Big Cap Index -9%, and UK -12.3%. With a strong U.S. economy and a strong dollar, U.S. stocks have been the best on the globe in 2018, but can they hold up in a sea of declining markets? Trade war fears and a tightening Federal Reserve policy made the market cry "uncle" in the past two months. Strong earnings and revenue reports were ignored.  Some former market leaders dropped over 20% as money moved into Treasuries, Utilities and Consumer Staples. Two 10% corrections in 10 months plus a 10 year old Bull market were enough to cause investor confidence to cave. What's next? Recession is still not on the horizon. This coming year SPX estimates anticipate a rise of 9%. FactSet sees a forward P/E ratio of 15.1x versus a 5 year average of 16.4x. Fears of peak earnings seem premature. We are likely however to see slower GDP growth and declining margins which may translate to low single digit earnings growth in 2019.  We expect a choppy December due to more tax selling, an interest rate hike expected Dec.19 and trade tweets. The bottom-up target for the SPX is 3163 according to Fact Set if forward estimates are correct. This is an optimistic view indeed. We are now in a late cycle economy when capital spending typically kicks in but the consumer represents 70% of GDP. Channel checks and news from the likes of Boeing show strong backlogs into 2020 and beyond. Will this be enough to keep earnings up and margins steady in a trade war economy? Perhaps not. If trade negotiations go awry and the rest of the world's economies drag us down, the 2940 SPX top on Oct. 3 might well be a cyclical top. Prior post election markets offer some hope of better months ahead. One year after the mid-term election day, markets have been higher 100% of the time dating back to 1946, according to Bespoke Research. There are no guarantees that past performance is prologue in markets. The spread between low and high quality bonds has widened of late and the yield curve is flattening causing us to seek more safety in both bond and stock portfolios.We have begun to experience some yield curve inversion as I write. Color most bond investors confused. Foreign stocks are historically cheap versus domestic stocks but global rates of growth are suspect. Both U.S. and European monetary stimulus is slowing in 2019.    Time will tell how things sort themselves out. We wish you and your families a wonderful holiday season ! 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.

November 2018

Wall Street Journal Headline Sums Up Last Month's Market Action:

October Selloff Sends S&P 500 Down 6.9% for the Month

After reaching all-time highs of 2940.91 on Oct 3, the index fell to 2601 Oct 29th. Nasdaq having led the rally this year was down 9.2% and the small cap index Russell 2000 fell 10.9% on the month. Many leading stocks saw bigger declines from their 2018 peaks; Alphabet -21%, Amazon -28%, Facebook -36.4%, Home Depot -20.6%, Netflix -36%, and Schwab -30%, just to name a few.

October, saw drops in almost every global stock market, as well as most bond indices.

Year to date drops, measured by iShares, in various categories tells the grim tale:

      • AGG -2.41%, Aggregate U.S. bonds

      • ILTB -8.84%, Core long term U.S. bonds

      • IEFA -9.4%, MSCI EFA index

      • IEUR -9.92% Core MSCI Euro stocks

      • IXUS -11.15%, Core MSCI Total non-U.S. stocks

      • IEMG -16.13% Core MSCI Emerging market stocks

Has the market for U.S. stocks peaked despite record profits, record low unemployment levels, low inflation and low long term interest rates with 3.5% GDP growth,3.1% wage growth and Consumer confidence the highest since 2000?

The market seems to be signaling an impending recession despite the lack of one in any economic forecast for 2019.

On January 26, the NYSE Composite index peaked at 13637.02 and closed at 12,200 by the end of October, never making a new high thereafter. At this year's 11,820 low we saw a 13.3% decline for a very broad market index. This measure dropped 20% from the April 2014 peak to its January 2015 nadir.

1-year T Bill’s pay 2.65% and the 2yr is 2.85%. Both yields are more than the 2% Fed inflation target and provide a positive inflation adjusted return. Competition now exists for stocks and foreign bond investors.

Some experts believe the Fed has pushed the funds rate up too far and too fast. Consensus earnings for the SPX are expected to be $162 for 2018 and $178.30 for 2019 according to Yardeni Associates.

That gives us a 16.79 P/E multiple this year and 15.2x multiple on 2019 earnings at a 2720 SPX index level. This is not expensive, but confidence is slipping for next year's numbers.

According to FactSet:

"As of Oct 29th, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is above the five-year average of 71%. In aggregate, earnings have exceeded expectations by 6.5%, which is above the five-year average of 4.6%. Due to these positive EPS surprises, the earnings growth rate for the S&P 500 has improved to 22.5% today from 19.3% on September 30.”

Given the strong performance of actual earnings relative to analyst estimates and the improvement in the earnings growth rate over the past few weeks, how has the market responded to positive EPS surprises during the Q3 earnings season?

Companies in the S&P 500 that reported positive earnings surprises for Q3 have seen a decrease in price of 1.5% on average, from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported positive earnings surprises have witnessed a 1.0% increase in price on average during this four-day window.

If the final percentage for the quarter is -1.5%, it will mark the largest average price decline over this 4-day window for S&P 500 companies reporting positive EPS surprises since Q2 2011, which was down -2.1%.

This translates simply to the fact that our market had more than fully discounted this wonderful earnings season by September.

We have moved from #TINA, There is no Alternative, to #TINPTH, There is no Place to Hide market.

If the October drop was a classic correction in an ongoing bull market, we will likely recover the lost ground quickly. If tariff policies, weak foreign economies, and higher interest rates give rise to rising inflation expectations and falling GDP we may have seen the peak in stocks for this cycle.

We are however, entering the strongest part of the calendar year. From November-April stocks tend to rise much more than during May-October periods. Additionally, post midterm election years are historically good market years.

Time will tell if history repeats, rhymes or becomes irrelevant. In our opinion, trade policy and future Fed actions are the most important and impossible to predict factors.

If you wish to review your portfolios or your investment goals please call or email us for a conference or meeting.

Don't forget to vote, it is our right and our privilege as Americans.

Doug Coppola

John Coppola

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

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October 2018

Stock Market Observations:

October 11, 2018

The SPX has dropped from 2940.91 on Oct. 3 to 2745 today. This is a 6.6% fall in six trading days. Since August 22,2018, the 10-year treasury note yield has risen from 2.81% to a high of 3.24% made on Oct. 5th. The trade war talk vis a vis China has eroded confidence that a solution is near. The November 6th elections loom and their results remain in question. The national political rhetoric is divisive on all sides. Declines often occur quickly and sometimes because panic driven selling ensues as we saw yesterday. This is a normal part of liquid markets movements. It is not pleasant.

The key question, has the market peaked for this cycle? Markets do not die of old age or a sudden swoon in sentiment We saw a 10% drop this past February. Tops are put in over long periods and sometimes end as prices go parabolic. We again see fear not euphoria.

Earnings reports are about to commence for Q3 and they will be up more than 20%. Interest rates are historically low, as is inflation.

Market leadership may change as the cycle matures. Growth stocks have led this cycle with tech names in the lead, but they periodically experience some big drops along the way shaking out non-believers.

The latter part of any calendar year is often positive for the U.S. stock market. September and October can be bumpy but November-January are typically strong months. Post midterm election years are historically bullish.

We expect the SPX 2766 area will start to bring in buyers as it represents the 200-day moving average. The RSI -Relative Strength Index- is now down to 21 this is a super low not seen since 2014. This is a bullish buy zone.

Nasdaq just had its worst month since 2008 as profit taking has led to fearful selling.

Warren Buffet got rich buying great companies during panics and staying the course over the long term.

Should you wish to talk, feel free to call.

All the best,

Doug

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.

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.

August 2018

U.S. Earnings Shine

The lazy, hazy, crazy days of summer are upon us. Stocks have meandered higher while bond yields have drifted lower. The SPX is now 2822 or 1.8% below it's all time January 26th high of 2872. The U.S. economy is strengthening despite the fact we are in the 10th year of economic expansion. Unemployment is near an 18-year low, credit is readily available, and consumer confidence is high. No recession is on the horizon.

Second quarter earnings season is wrapping up with 91% of the S&P 500 having reported quarterly results.

• Second quarter EPS are up 25% with sales up 10%. Expectations were for 20% EPS growth with sales up 8.4% heading in to the reporting season, this is roughly in-line with the modest upside we typically see relative to Wall Street estimates.
• Third quarter EPS are expected to grow 20% with sales up 7.2%, in-line with estimates one month ago. Estimates for the following quarter normally get pared down bit based on conservative guidance.
• For the year, EPS are expected to grow 20.6% with sales up 8%, marginally higher than one month ago.

The clouds in this pretty picture include the effect of widening tariffs, the upcoming midterm elections, the Mueller probe continuing without solution and increasing tensions with Turkey, Iran, N. Korea, Russia and China.

Additionally, we have a narrowing difference in 2 and 10-year Treasury yield spread. The 2 year is -2.61% and the 10-year is -2.88%. The Fed is expected to raise rates 2 more times this year and next. This may lead to an inverted yield curve, signaling a future recession.

The U.S. dollar has strengthened across the board hurting returns from foreign investments and slowing earnings growth from U.S. multinationals. $DXY the trade weighted U.S dollar index is up nearly 5% this year and at a 52-week high as tariffs exacted on foreign trading partners has driven investors to keep their investments closer to home.

As markets work their way through summer doldrums, U.S. stocks have advanced while foreign markets swoon, particularly in China.

Gold trades at a new 52 week low. EEM-$42.48, the emerging markets ETF is not far off 52-week lows and 18% off its Jan 26 highs.

Value stocks have underperformed again in 2018. Growth stocks have far outperformed Value this entire market cycle.

U.S. stocks continue to outperform bonds. AGG -$106.29, the iShares Core U.S. Aggregate Bond fund is down 1.12% year to date, IVV -$284.11, iShares Core S&P 500 ETF is up 5.7%.

We shall see what the balance of 2018 has in store. It takes time to unravel a long bull run and time is always on the side of long term investors. With low inflation, low interest rates and rising earnings the bull trend has the support to continue. If the trade wars worsen however, the positive economic climate will change across the globe. If this trade war ends and leads to lower tariffs stock markets everywhere will likely rise.

We are pleased to now be offering Financial Plans for our clients who desire one. Financial Planning is about more than assets, investments and net worth. Together we can work to better identify your concerns, expectations and goals.

Retired or Employed we are ready to help you understand your financial situation and plan for a more secure future.

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

July 2018

We saw lots of disparate movement in financial markets during the first half of 2018. After the January jump, the last five months saw returns of +1 for the NASDAQ, -4% for the S&P 500 and -7% for the DJIA.

The first month of the year began with a 6.7 %+ surge. U.S. stock prices then followed with a swift 10% correction. On Jan. 26, the S&P 500 peaked at 2872.87, with the low of 2533 on Feb. 9.

Year to date, the SPX closed at 2726, up +1.7%, while the DJIA closed down 1.8%. Small caps led the positive parade along with Energy and Technology. Nasdaq made all-time highs on June 20th. Oil prices surged with WTI closing at $74.1/ bbl. The U.S. is now the leading world producer and has become an exporter of energy as well. Consumer Staples, Financials, Telecom and Transports were all down in the first half. Emerging markets dropped 6.6% and EFA, which represents developed non-U.S. markets, dropped 2.4%.

AGG, the Aggregate iShares U.S. Bond index was down 1.66% along with the 20-year plus U.S. Treasury Bond ETF-TLT -2.98%.

The 10-year Treasury note closed with a 2.84% yield. The difference in yield between the 2-year and 10-year Treasury notes has narrowed to 31 basis points as the Fed pushes up short term rates. By year end we may see a flat yield curve unless long dated bond yields increase or the Fed slows its rate rises.

The most powerful bull market theme has been growth in a slow growth world.

Recent tax cuts pushed U.S. profits higher and some economists see 3% + GDP growth for the remainder of the year. Profits will rise about 20% quarter over quarter during the balance of 2018 and should continue to rise in 2019. Share buybacks were $433.6 billion in Q1 doubling the previous record of $242.1 billion. At the same time investors sold $23.7 billion of stock market funds in June, a new record.

Despite gruff trade talk from Washington, economic policies have been very good for corporate profits and the unemployment reached 50-year lows at 3.8% in May with little inflationary impact.

A tug of war in financial markets continues with fears of a trade war combined with tighter Fed policy and looming Congressional elections seen as possible negatives. Positives include higher profits, lower P/E ratios plus higher capital spending. Global growth depends on trading partners negotiating rather than imposing unilateral tariffs. The ultimate goal of this confrontation is to lower all tariffs, not precipitate a trade war.

A tariff is simply a tax on goods coming from another country. Tariffs cause higher prices for consumers and therefore slower demand for affected products. While we wait to see how this chess match unfolds stock markets stall or worse yet, decline. This concern has brought global net equity outflows to $20.2 billion last quarter, the worst since Q3 2016.

If this issue is resolved in a positive way the U.S. and global economies will improve and fears of an impending recession will fade. If not, slowing trade will hamper growth, profits will peak and markets will likely head lower.

Ed Yardeni, a well know market maven recently stated "this bull market will last as long as the economy expands." Recession is not yet in the forecast for the next 18 months. We have been in economic expansion since 2009, the second longest on record in the U.S. Markets however do not die of old age, we will be alert for changes in vital signs as facts on the ground begin to change.

Happy July 4th & Happy Birthday America!

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.