View from the Chair: Windermere's Market Perspectives (June 2017)

Balance.  Seems to be the key to everything in life these days.  Balance between work and life, balance between food we crave and food we know is good for us, balance between sleep and finding time in the day for our to-do-lists, balance between down time and family/friend obligations.  At times, balance seems effortless.  And at times, balance seems an impossible feat.

The markets are a bit of a balancing act these days as well.  For the majority of the time, things keep marching along with strong earnings, positive economic data, and sound growth - and then, we are thrown off stride with a geopolitical event (ex: recent terrorist attacks in London) or a new development in the current administration (FBI director replacement or ongoing Russia investigation). How do we keep our balance?  While it's not easy, we recommend that you focus on the dominant weight (earnings, growth, and upward potential in the markets) and do your very best to not let temporary disruptions break your balance.

The Dominant Weight

Why does the good news overpower the noise these days?  Here are just a few of the factors we feel tip the scales in investing's favor

  • Market's journey since election day - The below chart shows that while there has been some recent pullbacks, the move from election day is still impressive and reminds us that pullbacks are healthy and part of the process.  We anticipate more in coming months as the Fed continues to raise rates and more political events inevitably arise.

 

  • Strong earnings - The mostly-completed earnings season, according to Bloomberg, saw close to 80% of companies in the S&P 500 beat consensus earnings estimates; while more than 60% beat on the revenue estimates, a high historical beat rate for top-line growth (which is harder to manipulate)

 

  • Favorable economic data - Economic data continues to indicate strength in the markets and the economy.  Some highlights:
    • Corporate confidence:  The Empire Manufacturing Index slipped into negative territory at -1.0, but the Philadelphia Fed Index surprisingly rose to 38.8 from 22.0.
    • Homebuilding: National Association of Homebuilders (NAHB) Housing Market Index (HMI) rose to a robust 70 from 68.
    • Productivity:  Industrial Production rose 1.0% in the most recent reading, the largest gain since August of 2014, while capacity utilization rose to 76.7, the highest level since August 2015. These data points can be volatile, but they are pointed in the right direction.
    • Overall:  Index of Leading Economic Indicators (LEI) continues to show a growing economy, posting a gain of 0.3% in the most recent readin
    • Employment: Initial jobless claims (an indicator of both consumer and business confidence in action) continue to be remarkably low, indicating a continued tightening labor market.  This historically low claims level, combined with the historically low unemployment rate of 4.4%, appears to be pushing wages higher. This should help to support consumer spending and, as was from earnings season, hasn't yet begun to dent corporate profitability.

 

  • Recent performance - here's a summary of recent market returns.  History may not repeat but it does tend to rhyme

 

 

 

 

While it's hard to know what will tip the scale from day to day, we choose to focus on the predominance of evidence that points towards continued growth and opportunities to build wealth.  Sure, the balance will tip from day to day and volatility will never go away.  Observe it and stay the course - the tide will soon turn and balance will be regained.

Invest on,

Pam

 

 

View from the Chair: Windermere's Market Perspectives (May 2017)

Narrow.  That's one word to describe the trading range of US markets in recent weeks, or even months.  It seems any downward movement in markets are quickly reversed and any upward swing retreats (at least slightly) in a short time.  This is healthy market movement and the results have been favorable, as shown in the latest market returns.

 

Why are markets behaving this way?  Despite the headlines and the seemingly incessant overhang of pessimism and worry, markets have several things going for them, including:

1.) Return to fundamentals - the companies that make up the equity markets are on stronger footing than they were, even a year ago.  A recent report from Thompson Reuters reports that first quarter earnings are expected to be up almost 15% year over year and that of the 412 companies in the S&P 500 that have reported, 75.2% have beat analyst expectations (historical average is 64%).  

2.) Certain sectors lead the way - there are certain sectors that are outpacing others and helping to bring the broader markets with them.  Technology and consumer discretionary are chief among them and show no signs of retreating anytime soon

3.) Supply and demand - as we discussed last month, there is still an overwhelming amount of money (think trillions) that has left US equity markets throughout this epic bull run.  And as markets offer slight corrections, some of these funds are coming back in - bringing prices right back up (as demand rises, prices rise).  We anticipate this trend to magnify as interest rates trend upwards and fixed income investors rotate into equities in increasing number

4.) Relative stability at home and abroad - we do not overlook or discount the potential for instability and black swan events that remains around the world (especially in North Korea and Syria).  We have a new political regime at home and that too introduces new risks and unknowns.  These risks will always remain to some extent and cannot be completely hedged. However, recent developments (such as the French election results, US administration making some progress of tax reform and healthcare) give some current peace of mind to markets and allow forward progress to continue.

We know we continue to say this, but it remains a great time to be invested.  Markets may be in a narrow band, but you are already on board and can continue to enjoy the ride.

Invest on,

Pam