May 21, 2019
Market & Economic Outlook | May 2019
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STATE OF THE MARKETS
STATE OF THE MARKETS (S&P 500 +13.48% YTD through 5/20/2019)
Stocks climbed to new all-time highs in late April as investors celebrated solid earnings reports and renewed optimism about continued growth of the U.S. economy. In just the last four months, the S&P 500 has rallied +25% off the lows set on Christmas Eve, making this the best start to a calendar year since 1987. Stocks have also powered higher because the Fed has switched gears and is now signaling no more rate hikes in 2019.
One interesting trend to note is that despite the strong start to 2019, we have not seen money put to work in the stock market. Record amounts of money sits in cash, even today. Going forward, that could be a positive sign for stocks, as investors sitting on the sidelines grow impatient and may decide to put cash to work as they feel more comfortable with continued growth in stocks and in the economy, especially if a trade deal with China is reached (more on that below).
But what about the so-called “earnings recession”? As we entered 2019, many forecasters were calling for an earnings recession, which is defined as several quarters of earnings decline. Slowing global growth and weak car sales were the main reasons cited for the expected earnings drop of 2-4%, predicted by many pundits. Instead, 73% of S&P 500 companies beat earnings estimates, and earnings growth was around +2% in the first quarter of 2019.
Going forward, earnings are expected to accelerate over the coming quarters and rise 11.3% in 2020, which is a positive sign for continued growth in the stock market.
If the U.S. economy continues to grow through the end of May, it will be the longest growth streak on a sustained basis in U.S. history – 120 straight months!
We remain optimistic that the U.S. and global economy will continue to improve. Here in the U.S., 1st quarter GDP growth was +3.2%, productivity grew +3.6%, and we had 263,000 new jobs reported.
The productivity of non-farm payrolls increased 3.6% in the first quarter and compared to last year, grew at its fastest pace in almost a decade. Increased productivity is a good sign of future growth in wages as well as growth in the economy, as a more efficient work force means companies can raise their wages without hurting profits.
The elephant in the room that has rattled the stock market this month is trade tensions with China. On Friday, May 10th, President Trump raised tariffs on $200 billion of Chinese goods after China “broke the deal.” The good news is tough trade talk with China is bi-partisan and that’s important if we hope to stop 20+ years of unfair trading practices (forced technology transfers, technology theft, hacking, and espionage).
The other bit of good news for trade negotiations is that the U.S. is in a position of strength. The 25% tariffs are expected to shave 0.3-0.4% off U.S. GDP this year. But in China it shaves up to 3% off their GDP in 2019. We continue to believe that a trade deal will happen, but we may have to accept some short-term pain with a rocky stock market in the interim.
In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:
- Review Your Asset Allocation
With stocks so close to their all-time highs, it’s a great time to re-assess your asset allocation and reduce your allocation to stocks, when appropriate. Because the market has been so strong in 2019, most clients have experienced an increase in their allocation to stocks, and for some, that allocation to stocks has become bloated.
While it may be difficult to cash in and reduce your allocation to stocks when times are good, the disciplined reduction to stocks in your portfolio should prove wise, when the next recession and stock market downturn arrives.
We continue to advise clients to reduce their allocation to stocks, when appropriate. If you have questions about your current asset allocation, please give us a call.
- Rising Dividend Stocks
A perennial favorite of ours at True North, dividend stocks tend to perform exceptionally well when the 10-year treasury yield is below its one-year average and declining. That is currently the case, so consequently, we continue to favor rising dividend stocks in virtually all client portfolios.
Rising dividend stocks offer the potential for an increasing stream of income, inflation protection, and some down-side protection when stocks decline. High-quality dividend stocks also provide investment-grade credit ratings, lower earnings-growth volatility than the S&P 500 Index, and a higher return on equity than your average stock – a great recipe for long-term wealth building in your portfolio.
Stocks climbed to new all-time highs on renewed optimism about economic growth and the likelihood that the Fed won’t raise rates in 2019. Record amounts of cash currently on the sidelines could fuel further gains, if we get a trade deal with China.
Please help us in welcoming the newest member to the True North Team, Casey Stratton!
Casey is an Oregon native and lives in Oregon City with her husband and their two young daughters.Prior to joining the True North team Casey worked in Client Services at Fisher Investments for approximately 3 years. Casey specializes in providing our clients with unparalleled service and operational expertise. She understands the level of confidence it requires to trust someone with your assets and will do whatever it takes to help facilitate seamless account management for our True North clients. When not in the office, you can find Casey doing anything fitness related, or spending time with her family.
Casey holds a double BBA in Entrepreneurship and Marketing from the University of Portland.
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The views outlined in this newsletter are those of True North Retirement Advisors (TNRA) and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for a given client or portfolio.
Investing in stocks includes numerous specific risks including the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a declining market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Any questions regarding the applicability of any specific issue discussed above should be addressed with TNRA. All information, including that used to compile charts and/or tables, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.
Moreover, you should not assume that any discussion or information contained in the newsletter serves as the receipt of, or as a substitute for, personalized investment advice from TNRA or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with TNRA or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.