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STATE OF THE MARKETS
STATE OF THE MARKETS (S&P 500 +15.2% YTD through 4/11/2019)
Stocks reached their highs for the year in early April – rising over 15% for the year and are now within 1.3% of their all-time highs (S&P 500 Index). As long as the Fed remains in a holding pattern on interest rates and inflation remains muted, there is no reason to think that stocks can’t break-out to new highs.
Back in December, an aggressive Fed and fear of a recession pushed the market down nearly 20%. But now there are signs that the economy is back on track – March payrolls climbed $196,000, the Atlanta Fed is now expecting 2.2% GDP growth in the first quarter, manufacturing activity perked up in March, and the housing market has improved with lower borrowing costs and higher new home sales.
We are finally seeing stronger economic growth from China – March manufacturing rebounded strongly, and the service sector rose to its highest level in 14 months. And with a trade deal appearing more and more likely between the U.S. and China, there is a good chance we could see global growth accelerate and Europe start to recover. This should be good news for overseas investing and for earnings growth later this year. FactSet (April 5, 2019) is projecting an earnings decline of 4.2% in the first quarter, zero earnings growth in the 2nd quarter, 1.6% growth in the 3rd quarter, and 8.2% in the 4th quarter.
The IPO market is expected to be red-hot in 2019, as underwriters and executives prepare to take advantage of a strong market (NASDAQ up 20.1% as of 4/12/19). Lyft Inc. is leading a parade of Silicon Valley companies that have one thing in common – huge amounts of red ink. In 2018, Lyft lost $911 million. Uber Technologies, another potential future IPO, is losing $800 million a quarter. WeWork reported a $1.9 billion loss on revenue of $1.8 billion.
Many of these potential IPOs have spent heavily on marketing and have incurred huge losses. Their private capital investors are looking to cash out on the backs of new investors from the IPO. Consequently, we caution buyers to beware. Other IPOs with huge losses have faired poorly in the after-market (Groupon, Vonage, Snap, etc.). Our discussion of IPO’s is not a recommendation to buy or sell any new IPO offering.
ECONOMIC UPDATE
One of the key components needed to keep inflation low is productivity gains. Between 2000 and 2007 productivity gained 1.4% per year, but since then, its grown only 0.4% per year. But in 2018, it grew 1% and could be starting to have a significant impact on the economy.
When productivity is growing, companies can produce more with less, profits increase, and workers benefit from higher wages, low cost products and more job opportunities. In the 1980s and 1990s computers and the internet transformed business. Now we are seeing the early stages of digital technology (iPhone) transforming business again.
Interest rates have dropped to their lowest level since December 2017 – now at 2.374% as of March 2019 on the 10-year Treasury. Just last November, they were at 3.25%. Other government bonds have also dropped – the German 10-year Bond is at – 0.078% and Japanese bonds are at their lowest yield in over two years.
Central banks around the world have signaled they are willing to hold rates lower longer than investors anticipated. Much of the recent drop is due to slowing growth in the EU and in China. Other factors keeping rates down is low inflation and productivity gains. Here at home, the Fed has done an about face and instead of raising rates, it has signaled it’s on hold for the rest of 2019. In fact, there are now predictions that the next rate move by the Fed will be a rate cut.
INVESTMENT THEMES
In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:
- Reasses Your Asset Allocation
We believe with stocks so close to their all-time highs, it’s a great time to reassess your asset allocation and reduce it when times are good like they are now. While many investors are reluctant to cash-in when things are going so well, that is the perfect time to do so.
Why wait for the next 20% drop to reduce your allocation? Likewise, when stocks have hit lows or are down 20% that is when you should be thinking about adding to stocks, not selling. For these reasons, we suggest looking closely at your asset allocation to make sure it is appropriate for your age, risk tolerance, and income needs. Call us for a free assessment of your appropriate asset allocation level.
- Rising Dividend Stocks
Dividend stocks are strongest when the 10-year yield is below its one-year average and declining (WSJ April 1, 2019), which it is now. Consequently, we continue to favor rising dividend stocks in virtually everyone’s portfolio. They offer the potential for an increasing stream of income, wealth creation, inflation protection, and some down-side protection when stocks decline. Just because a stock has a high yield doesn’t mean it’s a high-quality dividend stock. High-quality dividend stocks have investment grade credit ratings, lower earnings-growth volatility than the S&P 500 Index, higher return on equity than your average stock, and large cash positions.
Bottom Line
Stocks appear to be poised to achieve new heights in 2019 as the Fed remains dovish and inflation muted. Now that we are seeing green shoots from China and the likelihood of a trade deal between the U.S. and China, economic activity should start to accelerate worldwide.
Safe travels to Ashley as she embarks on new adventures in Jerusalem for the next couple of weeks! Here she is on a boat ride on the Sea of Galilee.
