Markets Might be Wobbly, but the Economy is Fine

Transcription

1 Markets Might be Wobbly, but the Economy is Fine We've Been Here Before, No One Believes Stocks Can Go Higher - Ed Yardini Strongest Earnings Season since 2011, Strongest Profit Margins in a Decade, Largest Corporate Case Piles in a Generation The markets tensions and persistent high volatility has started to subside. These behaviors typically lead to higher stock prices. Bond Market, Yield Curve Flattening Showing Warning Sign but not in Danger Zone yet. GLOBAL MARKETS YEAR TO DATE PERFORMANCE Global Markets YTD Performance Gold (IAU) -2.21% US High Yield (HYG) -1.13% Real Estate (IYR)-1.426% Emerging Market (EEM) -2.75% Investment Grade Bonds (LQD) -5.05% Commodities (DBC) 5.692% Bond Aggregate (AGG) -2.92% US Small Caps (IWM) 7.024% US Treasuries (TLT)-4.83 US Large Caps (IVV) 2.197% Global High Yield (GHYG) -0.33%

2 US STOCKS Smooth sailing for all 2017, followed by 10% drop in 3 days has left the market churning in indecision this quarter, Intraday swings of 50+ S&P points will leave a lot of people scratching their heads saying, what the heck is going on?. Most Economists are also frazzled because they do not know what to believe. There appears to be a softening of Global economic data recently, while the U.S. data is targeting 3% GDP growth, record employment and all-time high industrial production in Essentially the abnormal calm of the last 2 years has left us all spoiled for steady returns. QUARTERLY SPX (Quarterly Returns above) Over the past five years, just about every calendar quarter since 2013 has generated a positive return. That was not the case prior to Stocks do go down. Sometimes they do it quickly and sometimes it takes quite a while to stabilize. Sometimes they go down a little and sometimes they go down a lot. Sometimes it's because of a recession and sometimes it's not. Rest assured that every time there will be someone you have never heard of and they will be the person who gets credit for predicting it. Every time someone who has been bearish for the entire bull market will now begin to pound their chest and claim victory. Then there comes a time stocks can shake off what ails them and go up. It is a testament that demonstrates how we, as investors, need to stay with what got us here, which is our solid risk management plan.

3 During times like these, with this seesaw action, we tend to get lured into watching our portfolios day to day it may seem easily start to sway us away from the discipline of the strategy. It is an ongoing dilemma for some, but as we have communicated over time, the ultimate challenge for JCN is to continue to educate and relay, in great detail, our investment strategy so that we can achieve confidence through thick and thin. The big mistake often made is telling ourselves it's time for a change because of the outside influences that affect our stock market judgment. Pessimism and doubts (FOD - Fear of Disaster) are intellectually seductive and those arguments always sound smarter, especially when they dovetail with our own worries. One of the reasons investors fall into this trap is because a strategy undergoes a period of underperformance, or more broadly speaking, a drawdown. That's perfectly normal. If one has a valid strategy to start with, then these drawdown occurrences should be met with the Stick to the Plan approach. S&P 500 INTRA-YEAR DECLINES VS CALENDAR YEAR RETURNS Most of the time, it is, and we as investors need to check their emotions at the door and exercise patience. The message during this corrective period has been, watch what is important, which is the earnings picture. Earnings are here, and the picture looks positive.

4 ßMaybe the sky isn't really falling. Economy When April 30 th rolls around, the U.S. economy will have expanded 106 consecutive months, matching the second-longest expansion on record. The longest is the 120-month expansion from March 1991 to March By July 2019, this will be the longest expansion on record assuming we get that far. According to some, we should have experienced two recessions by now, as they based their forecasts on age and duration. Many of these same pundits are the people forecasting an imminent recession. We cannot come up with one reason to follow them as of now. The factors most likely to accelerate the end of this cycle: Perceived trade war between the U.S. and China becoming a real one, and The yield curve inverting quickly and sharply. The factor most likely to extend this cycle is very benign inflation reinforcing itself in 2018 and 2019, tempering the Federal Reserve Bank hiking cycle and possibly extending activity further, which could mean this would be the longest cycle on record by some distance when it eventually ends. Earnings Observations Factset Research Update: Q (with 17% of the companies in the S&P 500 reporting actual results for the quarter), 80% of S&P 500 companies have reported a positive EPS surprise and 72% have reported a positive sales surprise.

5 Earnings Growth: For Q1 2018, the blended earnings growth rate for the S&P 500 is 18.3%. If 18.3% is the actual growth rate for the quarter, it will mark the highest earnings growth since Q (19.5%). Valuation: The forward 12-month P/E ratio for the S&P 500 is This P/E ratio is above the 5-year average (16.1) and above the 10-year average (14.3). Remember how many times we were told since this bull market started that margins have peaked? And that earnings increases could not be sustained? Wrong! The blended net profit margin for the S&P 500 for Q is 11.1%. If 11.1% is the actual net profit margin for the quarter, it will mark the highest net profit margin for the S&P 500 since FactSet began tracking this data in Q As of today, all eleven sectors are reporting or are expected to report both earnings and revenue growth for the second straight quarter. U.S. TRESURY SECURTIES HELD BY THE FEDERAL RESERVE

6 AVG STOCK S DISTANCE FROM 52-WEEK HIGH BY SECTOR Since we strongly believe that it's impossible to predict the future and safety first is always the best policy. Historically, Market Crashes and Bear Markets statistically only happen in deflationary recession type environments, which is what JCN s eject handle systems are prepared to strategically avoid when the time arises. UNITED STATES STOCK MARKET WITH VOLATILITY Volatility has been very low for an abnormally long amount of time. One thing to note is when volatility does subsite, it can lead to large stock market gains.

7 EMERGING ECONOMIES STOCK MARKET WITH DRAWDOWN Strong Dollar makes it difficult for most emerging market companies to compete in the global markets. We avoid these types of stocks for the most part, because of the embedded risk that comes with these types of companies. UNITED STATES SMALL CAPS MARKET WITH DRAWDOWN Small Cap stocks remain very strong mostly from TAX changes and strong dollar tailwinds. We avoid Smallcaps because of the imbedded risk that comes with owning small companies.

8 UNITED STATES REITs MARKET WITH DRAWDOWN As we have advised for the better part of the year, we have been avoiding REIT and Real Estate like investments in anticipation of a dip from rising interest rates. With the REIT index down almost 18%, at some point these will become attractive enough that we will implement a modest position in our blended model portfolios. In closing, we encourage you to attend our Summer 2018 speaker bureau sessions which we will go over uniquely valuable information that we have recently researched.