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November Month in Review
Markets continue to show their resilience for this year and investors continue to question how long this nearly zero-volatility will last, as November ends and we enter the last month of the year. The S&P 500 finished the month up 3.07%, the MSCI World ex-USA index ended up 1.01% and the bond market (measured by the Barclays Aggregate US Bond Index) ended almost flat at -0.14%1. The leading contributor sectors were Consumer Staples, Consumer Discretionary and Industrial sectors. The leading detractor sectors were Technology, Energy, and Utilities1.
Leading the momentum in the U.S. was another great season of earnings growth year-over-year as well as an increase in forward estimates. Currently we are seeing a majority of companies beating their earnings estimates and beating their revenue estimates. This is a great sign for the next 12 months2. This includes the negative affect the hurricanes have had on the financial sector, and thus we could see a pickup in that sector as it heals from the immediate effect of these natural disasters.
What’s still very encouraging is not only what is going on in the U.S., but what is happening abroad in the international markets. International markets have been lagging from the recovery of early 2009. With the troubles happening in Europe, including negotiations with the Brexit, the oil crisis for emerging markets and the slowdown in China as they transition to a more service-centered economy…we have seen international markets fall behind in the recovery path over the last 8 years. What is good for investors is the dollar has stabilized, emerging markets have begun to come out of there recession, and international central banks are very easy in monetary policy, allowing these countries to finally show signs of growth. What’s also good for investors is that relative to the US, the valuations in international markets are not as high, and at the same time, they are paying a much higher dividend (3.1% vs. 2.0% in the U.S.)3.
But don’t worry; valuations are not actually high in the U.S. In fact, if you look back at the rise in the markets leading up to the Tech Bubble, valuations peaked at 27.2x earnings. That’s quite a bit higher than were we are at today (18.3x earnings). In addition, it’s good to be reminded that interest rates also have an effect on valuations. If interest rates are higher valuations tend to be lower. Back during the Tech Bubble, the 10 year Treasury was close to 6.4%...today it is closer to 2.4%3. So we have lower valuations in a better interest rate environment. All this to say we don’t see the market-highs today as a sure sign that we have peaked.
Finally, one of the most anticipated announcements is most likely coming in the next week or two. No, I’m not talking about the Fed raising rates. The market has priced in fully a 0.25% rate hike in the target rate4. I’m talking about the allusive tax reform bill. We have studied both the House bill and the Senate bill and while the reconciliation committee is currently reconciling…we believe that the final bill to be voted on will look much like the Senate’s proposal, as they have less votes to lose (one) in the Senate to still get something passed. What we see as highlights currently for individuals are the following:
Marginal tax rates will be going down
The standard deduction will be going up
Personal exemptions will be repealed, however we will see an increase in the child tax credit, and an increase in people who will qualify for it
AMT taxes may be going away
State and Local taxes (SALT) are on the fence for not being deductible anymore
The itemized deduction phase-out (I like to look at it as a surtax) will be repealed
529 Educational Savings accounts will be qualified for elementary – high school costs (with a limit per year)
However with all these changes, probably the most significant changes will be with the corporate tax rates, which will directly affect C-corps and businesses with pass-through income. This will provide a huge relief to small and larger businesses and we believe the market has not fully priced in the increased earnings that could result from it. What will come of the real bill, no one can actually say yet, however we do believe there is a strong indication that Trump will have a bill on his desk by Christmas. Anything later and we could see a small amount of volatility emerge…albeit only lasting a short while.
We will be sending out invites to our Annual Market Outlook webinar soon. So keep a lookout for the emailed invite.
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.
LPL Financial Advisor
Vice President, AGH Wealth Management
2www.lplresearch.com – House of Charts dated 11/20/2017
3JP Morgan’s Guide to the Markets – November – Slide 4 & 40
The economic forecasts set forth in the article may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing involves risk, including the loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.