Third Quarter Market Commentary

Transcription

1 7/12/2018 Volume 4, Issue 2 Third Quarter Market Commentary Overview: The Summer of Our Discontent Our last client correspondence took place earlier in the year after a shocking level of volatility rocked the markets and pushed us into a correction in a quick and unsettling fashion. Markets recovered from those lows, but have not found the footing to hit new highs. A great Q1 earnings season spurred by robust domestic and international growth and the nascent effect of the recent tax cuts have supported the markets in the face of trade tariff threats against the world at large. I support fair trade practices and the discreet use of penalties against countries who subsidize their own exported goods while limiting imports. But, the macro scale of the current tariff initiatives is overly broad-based and potentially destructive. Globalism has its drawbacks and pitfalls, but on balance, it has helped raise the world s standard of living. We have been here before; many economists feel the Great Depression was exacerbated and drawn out by the adoption of the Smoot-Hawley Tariff Act in Since the U.S. has generally been at the forefront on free trade, and has the trade deficit to prove it, it s not surprising that the pain of reciprocal tariffs would fall more on our trading partners than the U.S. While I am all for a review and reassessment of trading policy on a case by case basis, the impact on business confidence and eventually new capital spending and hiring decisions will be adversely affected by these proposed broad-brush tariffs. I always worry about the law of unintended consequences, which we can t know by definition, but on balance, can t be good. A quick look at the underlying economic fundamentals sees a global economy that is currently in a rare synchronized expansion. The US, Japan, Eurozone and most emerging market economies are growing at above historical levels. While the US central bank has begun the process of tightening interest rates, most of the world s central banks continue to provide more than ample liquidity to the global economy. First quarter corporate earnings, both in the U.S. and abroad, beat expectations on revenues and earnings and continued strong profit growth is expected throughout the year. This strong economic backdrop indicates a very low chance of domestic recession as U.S. annual GDP is expected by some to be well over the historical average of 3%. Since World War II there s not been a bear market without a recession or a Federal Reserve policy mistake. The current US market expansion is in its ninth year, which is long by historical standards. But, quoting Janet Yellen, most bull markets don t die of old age. A Return to Normality 2017 witnessed the first time that the stock markets climbed every month of the year. At the same time, measures of volatility hit historic lows. According to Ned Davis Research, considering that the MSCI All Country World Index (MSCI ACWI) has never gone so long without a 5% correction in its 30 years of history, while the S&P 500 hasn t rallied as long without even a 3% correction during its 90 year history, a return to more normal volatility can be expected this year. We re currently witnessing that volatility.

2 Third Quarter Market Commentary Page 2 We continue to maintain, for the time being, that equity markets will present positive returns by the end of But in light of this heightened volatility, we do advise clients to confirm their risk tolerances and their preferred allocations. For those clients with sensitivity to equity volatility, we recommend that they consider cutting their allocations back to target equity percentages and using those proceeds to enhance their cash portfolios for future market investment or short term cash needs. The above chart shows current market expansion is one of the longest on record which explains some of the pickup in volatility this year.

3 Page 3 Our positioning: We have begun the process of neutralizing our overweight portfolio positioning to equities and its corresponding underweight to bonds. The current bull market is showing some signs of being in the latter innings. Market breadth has narrowed as much of this year s equity market gains have come in the Technology sector with roughly half of that within FAANG stocks in particular. The salutatory effects on the market of deregulation, tax cuts and synchronized global growth may be fully priced in and the dangers of tariffs, rising inflation and tighter global monetary policy loom ahead. Global Purchasing managers Indices (PMI s) have softened and earnings growth may be peaking as well. Short-term interest rates are creeping up towards long term rates resulting in a flattening of the yield curve, a sign of economic slowdown. Importantly, we don t see a recession on the horizon, just a slowing. The bull market may yet gain its footing if an amicable resolution to trade wars can be found probably after the mid-term elections take place in November. We feel that a market rally may be well used to trim equity exposures in accounts that are on the high end of a stock exposure relative to their targets. We also continue to allocate a minimum exposure to alternative assets towards stabilizing equity volatility. We would expect to increase this allocation if economic and market deterioration lead to an underweight recommendation to stocks has been an exciting year so far, and I feel more of that is to come. One thing we can count on as we return to normal is increased volatility. Whether that choppiness is driven by higher interest rates, political rhetoric, or a North Korean rocket, the time of steadily improving equity markets and consistent bond returns is most likely over. Global economic growth is still expected, but it s going to get interesting as year over year comparisons weaken. As always, we remain vigilant in the pursuit of your financial success. Richard J. Diem, CFA Chief Investment Officer

4 EHD Advisory Services Allocation Q EHD Advisory Services Asset Class Allocation Stock Allocation Sector Allocation Stocks Cash Bonds Alternatives Large Growth Emerging Markets Small Cap International Developed Mid Cap Large Value Energy Real Estate Consumer Staples Utilities Financials Industrials Telecom Consumer Discretionary Technology Health Care Materials EHD Advisory Services, Inc William Penn Way Lancaster, PA Phone: Bond Allocation Investment Grade Corporate Investment Grade Municipal Floating Rate Emerging Market Debt High Yield Treasuries Agencies Alternative Allocation Managed Future Global Macro Interest Rate Hedge MLP s Commodities Major Changes in Q2 Reduce Equities to Target Cash + Bonds Raised to Target Weights Reduced International + Emerging Markets to Target Weight Increased Domestic Large Cap to Target Weight Fax: Rjdiem@ehdavisory.com Overweight Marketweight Underweight Kenneth L. Eshleman, CFP Principal, President Richard J. Diem, CFA Principal, Chief Investment Officer Joyce A. Libby, CFP Principal, Wealth Management Advisor Steven P. Maher Principal, Investment Analyst

5 DISCLOSURE FOR MARKET COMMENTARY THIS COMMENTARY INCLUDES REFERENCES TO CERTAIN INVESTMENT RECOMMENDATIONS BY EHD ADVISORY SERVICES, INC. OUR INVESTMENT ADVICE IS GIVEN IN THE CONTEXT OF EACH CLIENT S PARTICULAR INVESTMENT CIRCUMSTANCES AND OTHER PARTICULAR CONSIDERATIONS, AND IT SHOULD NOT BE ASSUMED THAT EHD ADVISORY SERVICES, INC. WILL MAKE THE SAME OR SIMILAR RECOMMENDATIONS FOR YOUR ACCOUNT. IT ALSO SHOULD NOT BE ASSUMED THAT IN- VESTMENT RECOMMENDATIONS MADE IN THE FUTURE WILL BE PROFITABLE OR WILL EQUAL THE PERFORMANCE OF ANY SECURITIES MENTIONED IN THIS MARKET COMMENTARY. THIS MARKET COMMENTARY INCLUDES STATEMENTS THAT DESCRIBE OUR EXPECTATIONS AS TO THE PERFORMANCE OF CERTAIN SECURITIES AND INDUSTRY SECTORS IN THE FUTURE. ALTHOUGH SUCH STATEMENTS ARE BELIEVED BY US TO BE REASONABLE WHEN MADE, CAUTION SHOULD BE EXCERCISED NOT TO PLACE UNDUE RELIANCE ON THESE STATE- MENTS, WHICH ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. IF THE RISKS OR UNCERTAINTIES EVER MATERIALIZE OR THE ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THOSE EXPRESSED OR IMPLIED BY SUCH STATEMENTS. PORTFOLIOS ARE SUBJECT TO THE GENERAL RISKS ASSOCIATED WITH PORTFOLIOS IN- VESTED IN EQUITIES AND BONDS. EXAMPLES OF RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: THERE IS A RISK OF LOSS OF PRINCIPAL. THERE IS A RISK THAT COMPANIES PURCHASED WILL NOT PERFORM AS EXPECTED. THERE IS A RISK THAT ISSUERS WILL DEFAULT ON DEBT OBLIGATIONS. EHD ADVISORY SERVICES, INC. CANNOT PROVIDE ANY GUARANTY THAT THE EXPECTATIONS DESCRIBED IN THIS MARKET COMMENTARY WILL BE REALIZED. THIS MARKET COMMENTARY IS ORIGINAL, WRITTEN BY EHD ADVISORY SERVICES, INC. AND ALL DATA, FACTS AND FIG- URES ARE FROM WHAT WE BELIEVE ARE RELIABLE SOURCES. HOWEVER, WE CANNOT GUARANTEE THE ACCURACY OF ANY DATA, FACTS AND FIGURES. PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS. THEREFORE, NO CURRENT OR PROSPECTIVE CLIENT SHOULD ASSUME THAT THE FUTURE PERFORMANCE OF ANY SPECIFIC INVESTMENT OR STRATEGY WILL BE PROFITABLE OR EQUAL TO PAST PERFORMANCE LEVELS. ALL INVESTMENT STRATEGIES HAVE THE POTENTIAL FOR PROFIT OR LOSS. CHANGES IN INVESTMENT STRATEGIES, CON- TRIBUTIONS OR WITHDRAWALS, AND ECONOMIC CONDITIONS, MAY MATERIALLY ALTER THE PERFORMANCE OF YOUR PORTFOLIO. DIFFERENT TYPES OF INVESTMENTS INVOLVE VARYING DEGREES OF RISK, AND THERE CAN BE NO ASSURANCE THAT ANY SPECIFIC INVESTMENT OR STRATEGY WILL BE SUITABLE OR PROFITABLE FOR A CLIENT'S PORTFOLIO. HISTORICAL PERFORMANCE RESULTS FOR INVESTMENT INDEXES AND/OR CATEGORIES, GENERALLY DO NOT REFLECT THE DEDUCTION OF TRANSACTION AND/OR CUSTODIAL CHARGES OR THE DEDUCTION OF AN INVESTMENT-MANAGEMENT FEE, THE INCURRENCE OF WHICH WOULD HAVE THE EFFECT OF DECREASING HISTORICAL PERFORMANCE RESULTS. THERE ARE NO ASSURANCES THAT A PORTFOLIO WILL MATCH OR OUTPERFORM ANY PARTICULAR BENCHMARK. ASSET ALLOCATION AND DIVERSIFICATION DO NOT ASSURE OR GUARANTEE BETTER PERFORMANCE AND CANNOT ELIMI- NATE THE RISK OF INVESTMENT LOSSES. ALL INDICES ARE UNMANAGED AND MAY NOT BE INVESTED INTO DIRECTLY. MSCI ACWI INDEX IS A FREE FLOAT-ADJUSTED MARKET CAPITALIZATION WEIGHTED INDEX THAT IS DESIGNED TO MEAS- URE THE EQUITY MARKET PERFORMANCE OF DEVELOPED AND EMERGING MARKETS. S&P 500 INDEX IS A CAPITALIZATION WEIGHTED INDEX OF 500 STOCKS DESIGNED TO MEASURE PERFORMANCE OF THE BROAD DOMESTIC ECONOMY THROUGH CHANGES IN THE AGGREGATE MARKET VALUE OF 500 STOCKS REPRESENTING ALL MAJOR INDUSTRIES. THE ECONOMIC FORECASTS SET FORTH IN THE PRESENTATION MAY NOT DEVELOP AS PREDICTED AND THERE CAN BE NO GUARANTEE THAT STRATEGIES PROMOTED WILL BE SUCCESSFUL. INVESTING IN STOCK INCLUDES NUMEROUS SPECIFIC RISKS INCLUDING: THE FLUCTUATION OF DIVIDEND, LOSS OF PRINCI- PAL AND POTENTIAL ILLIQUIDITY OF THE INVESTMENT IN A FALLING MARKET. THE PRICES OF SMALL AND MID-CAP STOCKS ARE GENERALLY MORE VOLATILE THAN LARGE CAP STOCKS. BONDS ARE SUBJECT TO MARKET AND INTEREST RATE RISK IF SOLD PRIOR TO MATURITY.

6 BOND VALUES WILL DECLINE AS INTEREST RATES RISE AND BONDS ARE SUBJECT TO AVAILABILITY AND CHANGE IN PRICE. CORPORATE BONDS YIELD MAY DIFFER FROM THE ADVERTISED YIELD. MUNICIPAL BONDS ARE SUBJECT TO AVAILABILITY AND CHANGE IN PRICE. THEY ARE SUBJECT TO MARKET AND IN- TEREST RATE RISK IF SOLD PRIOR TO MATURITY. BOND VALUES WILL DECLINE AS INTEREST RATES RISE. INTEREST INCOME MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX. MUNICIPAL BONDS ARE FEDERALLY TAX-FREE BUT OTHER STATE AND LOCAL TAXES MAY APPLY. IF SOLD PRIOR TO MATURITY, CAPITAL GAINS TAX COULD APPLY. HIGH YIELD/JUNK BONDS (GRADE BB OR BELOW) ARE NOT INVESTMENT GRADE SECURITIES, AND ARE SUBJECT TO HIGHER INTEREST RATE, CREDIT, AND LIQUIDITY RISKS THAN THOSE GRADED BBB AND ABOVE. THEY GENERALLY SHOULD BE PART OF A DIVERSIFIED PORTFOLIO FOR SOPHISTICATED INVESTORS. GOVERNMENT BONDS AND TREASURY BILLS ARE GUARANTEED BY THE US GOVERNMENT AS TO THE TIMELY PAY- MENT OF PRINCIPAL AND INTEREST AND, IF HELD TO MATURITY, OFFER A FIXED RATE OF RETURN AND FIXED PRINCI- PAL VALUE. ALTERNATIVE INVESTMENTS MAY NOT BE SUITABLE FOR ALL INVESTORS AND INVOLVE SPECIAL RISKS SUCH AS LEV- ERAGING THE INVESTMENT, POTENTIAL ADVERSE MARKET FORCES, REGULATORY CHANGES AND POTENTIALLY IL- LIQUIDITY. THE STRATEGIES EMPLOYED IN THE MANAGEMENT OF ALTERNATIVE INVESTMENTS MAY ACCELERATE THE VELOCI- TY OF POTENTIAL LOSSES. THE FAST PRICE SWINGS IN COMMODITIES WILL RESULT IN SIGNIFICANT VOLATILITY IN AN INVESTOR S HOLDINGS. INTERNATIONAL INVESTING INVOLVES SPECIAL RISKS SUCH AS CURRENCY FLUCTUATION AND POLITICAL INSTABIL- ITY AND MAY NOT BE SUITABLE FOR ALL INVESTORS. THESE RISKS ARE OFTEN HEIGHTENED FOR INVESTMENTS IN EMERGING MARKETS. VALUE INVESTMENTS CAN PERFORM DIFFERENTLY FROM THE MARKET AS A WHOLE. THEY CAN REMAIN UNDERVAL- UED BY THE MARKET FOR LONG PERIODS OF TIME.

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