Broker Check

April 2018 Month In Review

April showers came and now we wait for the flowers to arrive. In the same manor, April economic and market information came and we now await the response from corporations and investors. So far, corporations have given us great news (more below). For the month, the S&P 500, Russell 3000, and DJ Industrial Average all ended between 0.34% and 0.38% total return, while the international markets (measured by the MSCI World ex USA index) posted a much more solid +2.30%. Bond investors still felt the rise of interest rates on their bond portfolios with the US Aggregate Bond index losing -0.81%1.

Earnings reports have been stellar for the first half of earnings season. With over half of the S&P 500 companies reporting their results, almost 80% of them have beaten their estimates; well above the average. Towards the beginning of April we expected earnings to post an 18% year over year increase, which included the beginning results of the tax relief package. Now earnings are tracking to increase over 24%! Forward guidance has also been encouraging, and with market valuations (measured by forward P/E ratios) down almost 12% from their highs in January, the hope that valuations would stay steady is becoming increasingly possible. If earning expectations for the rest of the year are met and valuations stay steady, it would not be surprising to see the end of the year post strong positive returns for equity investors2.

To take a technical turn for a moment…we are also seeing strong resistance with the 200 day simple moving average, a very common and well-expected technical indicator. The S&P 500 has tested this line three times this year and each time has bounced off of it. While we don’t put a lot of stock in technical indicators predicting the long-term growth in the markets, we like to see resistance lines form. In the event we decide to take advantage of bouncy markets, we would have a higher conviction to make a move short-term if the markets bounce down to their resistance lines3.

Bond investors have had a rough start to the year. With the 10-year Treasury clipping the 3% mark in late April, bond prices have stayed true to their negative correlation to interest rates. While a 3% 10-year Treasury is not high in historical terms, it is a mental mark that pushes us closer to 5%. History has taught us that when the 10-year Treasury hits 5% and continues to increase, there is a stronger sign that the cost of business is beginning to be felt throughout the markets, and markets tend to respond negatively4,5. More importantly than the 10-year Treasury rate by itself, is the entire yield curves path. History has also told us that when the yield curve is inverted, meaning that shorter term rates are higher than longer-term rates, there is a recession looming in the future. One indicator we look at is the 10-Year Treasury Rate minus the 2-year Treasury rate (also known as the 10s-2s Spread). This indicator does show that we are moving closer to an inverted yield curve, however at the current pace and with the longer-term rates increasing with short-term rates, it could be 18 to 24 months before we truly see an inversion6. Additionally, Since 1980, the average time between inversion and recession has been 23.3 months, with a median of 19.8 months. Meaning that even if we inverted tomorrow, it could be easily 1.5 to 2 years before a recession occurs7. So from where we are today it could be much closer to 2-3 years, using the yield curve as a predictive indicator. That’s a lot of time for a market to go up.

One of the reasons the shorter-term rates may increase at a faster pace is the result of the Federal Open Market Committee (“the Fed”) rate decisions this year and next. We still expect them (the Fed) to continue to follow through with 3 rate hikes this year. We also expect there to be a lot of dancing between the Fed and wage inflation. One of the main concerns in the market is that wages will increase too fast, causing faster inflation and cost of living as well as cost of doing business. On the surface this sounds silly as all of us would love to see our personal wages increase. Increase wages would potentially mean increase consumer spending, which would in turn mean increase economic growth. However broad-based, systemic acceleration of wages has proven to be an inflation driver and a sign that an economy is running a little hot. The Fed and the markets will be watching these indicators closely over the coming months searching for an interpretation to the results.

Turning globally, there is an incredibly volatile mix of optimism and concern as we watch historic meetings of political leaders take place between North Korea and South Korea, and North Korea and the U.S. At this point we can only hope to see the civil unrest in Korea begin to break down and relations with North Korea and the rest of the world to become less hostile. True denuclearization in North Korea will be very hard to confirm and the intentions behind Kim Jong Un’s recent communications will be very hard to predict. The hope is that we move forward with peace talks cautiously, yet firmly, in an effort to truly create a safer world.

Finally, continued negotiations with China will be a hot topic this spring. A note of a small correction from my March Month-in-Review; while all China-specific tariffs have not gone into effect, signaling that the tariffs could be just negotiating tactics, the more broad-based steel and aluminum tariffs have actually been in place for a little over a month. Our allies continue to pursue exceptions to these current tariffs and in response, President Trump has delayed the imposing of these tariffs on our allies (Mexico, Canada, and the EU) until June 1st, to allow for continued “deals” to be finalized. Still the actual impact globally of these tariffs remains small8.

A reminder, if you have missed any of our Month-In-Reviews you can find them archived on our website at https://www.aghwealth.com/p/month-in-review.

Thank you for your trust and confidence.

                                                                                                                            

Brian Gensch

LPL Financial Advisor

Vice President, AGH Wealth Management

 

1 Morningstar Direct

2 https://lplresearch.com/2018/04/30/market-update-monday-april-30-2018/#more-9747          

3 https://finance.yahoo.com

4 https://fred.stlouisfed.org/series/DGS10

5 JP Morgan Guide to the Markets 2QTR 2018, slide 16

6 https://fred.stlouisfed.org/series/T10Y2Y

7 LPL Research Daily Morning Call 05.01.2018

8 https://www.bloomberg.com/news/articles/2018-04-30/trump-keeps-allies-guessing-on-steel-tariffs-as-deadline-looms

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly. 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.