During the month of May, the SPX rose 1.17%, Technology (XLK) soared 3.9% while Energy (XLE) faltered 3.5%. Large Cap growth names have led this year while many economically sensitive sectors have languished for the past 4 months. With the SPX, up 7% in 2017 and the Trump agenda on hold, some expect the market to stall in the summer months.   

  

While many averages are now touching new highs, 40% of SPX stocks are below their 50-day moving average. A handful of technology stocks have been responsible for a quarter of the SPX gain year to date.

U.S. 10-year Treasury bonds closed May with a 2.20% yield. The iShares U.S. Aggregate Bond ETF (AGG) gained 2.3% year to date. The headline unemployment level in May fell to 4.3 %, with U-6 unemployment at 8.4 %. Inflation is expected to range around 2% for the year, while average hourly earnings rose 2.5% year over year.

The Fed is set to meet on June 13-14 and will likely raise its short-term benchmark by one quarter point, to a range between 1-1.25%. Notably spreads between low quality and high-quality debt have narrowed, signaling greater confidence in the economy. Long term Treasury and Investment grade bond yields have declined in 2017 contrary to most expectations.

Markets around the world are in rally mode, with the French election easing fears of EU and Euro breakup. Japan while mired in a 27-year deflationary mind set, is trying to reach 2% inflation and its market is finally going up. China is managing 6.5% GDP growth and many other emerging markets have picked up.

With 98% of SPX companies reporting, the blended earnings growth rate is 13.9% the best year over year growth since Q3 2011.The forward 12-month P/E ratio for the index is 17.6. This is above the 5-year (15.2) and 10-year (14.0) average according to FACTSET.

We see a tailwind for earnings from a weaker dollar and a stronger global economy. If we get tax reform by 2018, earnings growth will further improve. Rising earnings which typically lead to higher stock prices continue nonetheless. Stocks while rich, appear to be climbing a wall of worry and bonds are signaling neither inflation nor recession.

Best Wishes for a Pleasant Summer!

Doug Coppola

John Coppola

June 2, 2017

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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March Madness
Stocks continue to climb on the back of higher earnings, steady interest rates and the prospects of lower U.S. tax rates.

The probability for repatriation of $2-3 trillion of U.S. corporate earnings, less regulation, and more infrastructure spending has sent the major averages to new highs.

Year to date, the Barclays U.S. AGG Bond ETF returned +0.67% while ​stocks as measured by the S&P 500 gained 5.57% to close at 2363.64.

The S&P 500 index has risen 9.4% since the day after the election, while the 10 Year U.S. Treasury rate on November 9th has risen from 1.96% to 2.35% at month's end.

We are in a market environment with rising interest rates and rising earnings.

Consensus price expectations by strategists for stock market gains in 2017 have been reached in most cases.

Further interest rate rises by the Fed starting mid-March are baked into bond prices.

Rising rates cause longer dated bond prices to go down. Many bond experts see the 10-year rate closer to 3% by year end.

Gold was up 8% year to date while the U.S. dollar is slightly lower.

​Spreads on high yield bonds have narrowed considerably in the past year as oil prices have doubled off their early 2016 bottom of $26/bbl.​

With no recession in sight, the Federal Reserve is expected to raise their benchmark Fed funds rate 3 times by year end or by 75 basis points. These are positive signs and as investor confidence rises, so do equity prices.

With Q4, SPX earnings up 4.9% and forward earnings estimate of $133.78 according to FactSet we derive a forward P/E ratio of 17.8 times. Q4 sales growth for SPX companies also rose 4.9%, which is a welcomed change.

Valuations are high, but not dangerously. One strategist argues that the current P/E level is justified with present long term rates being well below historic norms. This may account for the nearly 3 SPX multiples higher than the 15X long term average.

Bull markets die of euphoria not of old age.

While this bull ages we look for obvious signs of euphoria that would lead us to a cautionary stance.

A 10% market drop would be normal during the course of any year.

We have not had a big sell-off since the Nov, 2015 - Feb, 2016 decline of 14%.

If you have any questions please reach out to speak with us.

Spring & March Madness are upon us.

Doug Coppola

John Coppola

March 2, 2017

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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.

2016: A Year of Surprises  

Brexit and the Trump victory were at the top of the surprise list, as pollsters got both predictions wrong up to and including the day of the voting. Markets acted very negatively after the British vote but European indices recovered most losses by year end.

In the U.S. election, initial negativity from the surprise Republican sweep was wiped out the next day as stock markets rallied led by industrials and banks. Government bonds had the opposite reaction as higher growth and inflation are expected with Trump's policies. Small Cap U.S. stocks, measured by the Russell 2000 index dropped 27% from June 2015 to February 2016 then soared 44% into year end. The 10 year U.S. Treasury yield went to 1.336% in July, 2016 and ended the year at 2.446%. This was in fact a multiple year double bottom in yield terms and likely marked the cyclical low. This jump and yields caused a principal loss of about 10% in the 10-year note and dragged down other fixed income investments and many yield oriented stocks.

Gold rallied 30% from Jan. – July, 2015 then dropped about 16% into year end. The U.S. dollar index- $DXY dropped almost 7% from Jan. – May, 2016 then rose 11% into the close of 2016 marking a 14-year high. Domestic stocks outperformed most asset classes.

If one stayed the course and weathered early year volatility, fears of China and European slowdown, combined with political uncertainty you prospered. Defensive investments did not pay off in 2016.

Key asset classes had mixed annualized returns as measured by various Vanguard funds listed below:

VGIT-- Intermediate Government Bond Fund +1.12 %

BND-Total Bond Fund +2.57%

VTEB-Tax Exempt Bond Fund +0.17 %

VGK- FTSE European Stock Fund -0.59 %

VOO- S&P 500 +11.96%

VWO- Emerging Markets Stock Fund +11.75%

We enter 2017 with the U.S. economic expansion closing in on its eighth anniversary, the third longest on record.  The longevity of this business cycle may portend a coming slowdown, potentially culminating in a mild recession and bear market in stocks in 2018. With that said, we support the view that business cycles do not die of old age. Energy-related capital spending is recovering. Business and consumer confidence are up. Animal spirts are rising with more pro-business policies expected from Republicans who have majorities in both houses.  

The financial system shows few signs of stress. The federal funds rate has a negative, real yield. The yield curve is upward sloping and credit is flowing.    

Fiscal policy is expected to turn simulative, with lower taxes, less regulation, and more infrastructure spending. 

Probable outcomes include:

Lower corporate taxes.

Repatriation of $2-4 trillion in cash held by U.S. corporations overseas.

Increased defense spending.

Deregulation with respect to banking and energy.

Support for Mr. Trump's agenda will not be unanimous. However, we are confident legislation and regulatory roll back will come about in the first 100 days of the new administration. For the stock market, earnings for the S&P 500 Index in 2017 may increase to around $131. This places the price/earnings ratio at about 17.3 times, forward earnings before any corporate tax cut. 

Every 1% decline in the corporate tax rate is said to generate an additional $1.30 in earnings. If the Trump Administration were to achieve its goal of a 15% corporate tax rate, this would imply as much as an additional $26 in earnings. 

Economists and the Fed expect no recession in 2017.

Real GDP growth and inflation of about 2% over the next 3 years is the base line forecast. I would not be surprised by higher growth along with higher interest rates as full employment is likely to raise wage levels.

The risks of course are there as well, if Mr. Trump starts a trade war with China, Mexico, or Japan. Adversaries will try to test his Presidential metal in the foreign affairs.

We see a positive return on stocks for the year ahead. Bond returns will be more difficult given rising short term rates as forecast by most experts.

We look forward to discussing with you, your account positioning,  and your investment goals as soon as possible. 

We wish you all a very happy, healthy, and prosperous New Year!

Doug Coppola

John Coppola

January 6, 2017

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.

Please Access Your Advyzon Web Portal to View Your Account & Monthly Fee

Please Note Our New Mailing Address:

11312 15-501 N, #107-104 Chapel Hill, NC  27516

The long-awaited November election results surprised the world.

Republicans held majorities in the House and Senate and unexpectedly won the Presidency.

Mr. Trump's odds were 4-1 in betting pools on election day and soared to 12-1 early that evening.

The DJIA dropped 800 plus points in the overnight futures markets on Nov 8, but began to rally the next morning. Despite dire warnings by many, the DJIA rallied 5.8 % for the month. 

The SPX closed at record highs, up 7.58 % year to date and up 3.4% in November alone.

The shocking result caused a massive migration from bonds into stocks causing the third worse selloff in 30 years for US Treasuries.

November was the worst month ever for the Bloomberg Barclays Aggregate Total Return Index with a 4 % loss. 

Sentiment swiftly changed from low interest rates forever to faster GDP growth, higher rates are here to stay and inflation is coming soon.

More money was lost in bond markets than was made in stock markets.

Trump's policy proposals, previously ignored by the media, focus on reduced tax rates for corporations and individuals. He proposed a $1 trillion spending plan to modernize our infrastructure.

Repeal and replacing Obamacare takes pressure off small business and will aid job creation as employers no longer fear new full time hires costing them too much. 

With lower regulatory burdens anticipated on banks and manufacturing we saw an industrial and finance stock run heretofore absent for years.

Defensive stocks, even with good yields swooned, along with foreign stocks due to U.S. dollar strength.

Gold and municipal bonds plunged as safe havens were suddenly out of fashion. 

Growth stocks took a back seat to small cap value stocks and cyclical sectors.

This is what a bond yield tantrum, like 2013 looks like on the chart below.   

In summary, a sea change in markets and perception for growth prospects has occurred with the election results.

Bonds are no longer as safe a haven as they once were. Rates look like they bottomed in July 2016 at 1.33 % on ten year UST’s.

Hopes for a stronger for longer economy have improved given this business-friendly administration.

We are more bullish on stocks looking ahead and more concerned about long dated bonds.

Risk is back on for emboldened investors but it won 't be a straight line to higher prices.

The business cycle has not been repealed. We have not had an economic downturn in 8 years. Our national debt has doubled under President Obama. President Trump's new spending must be financed with more deficits. 

We are adjusting portfolios to reflect new realities.

All the best for a wonderful holiday season!

 Doug Coppola

John Coppola

December 1, 2016 

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. Please Access Your Advyzon Web Portal to View Your Account & Monthly Fee

The long-awaited election results came in on November 8-9 and the whole world was surprised.

Republicans held majorities in the House and Senate and most unexpectedly won the Presidency.

Mr. Trump's odds were 4-1 in betting pools election day and soared to 12-1 early that election evening.

The DJIA dropped 800 plus points in the overnight futures markets on Nov 8 but began to rally the next morning as the DJIA rallied 5.88 % in the month. The SPX closed at record highs up 7.58 % year to date and up 3.4% in November alone.

The shocking result caused a massive migration from Bonds into stocks in the third worse selloff in 30 years for US Treasuries.

Sentiment swiftly changed from low rates for as far and long as the eye could see, expected to be continued with a Clinton win, to faster GDP growth expectations. Trump's policy proposals very much ignored in the media are for lower tax rates for corporations and individuals along with a $1trillion fiscal spending plan on infrastructure.

Throw in lower regulatory burdens on industry and banks and we got a bull run the likes we have not seen in years.

Financials and Industrials soared while defensive groups with good yields swooned.

Gold and Bonds plunged as safe havens were suddenly out of fashion.

All the best for a wonderful holiday season!

Doug Coppola

John Coppola

December 1, 2016

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 the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.