May 8, 2019
If you don’t like the weather wait 24 hours
Dear Friends and Clients:
Those that live in Colorado have heard or said the above many times. I am using this title because to me it reflects the last six months of the market. As we all are painfully aware the 4th quarter of 2018 was a dramatic pull back. In my opinion the reversal was not caused by weakening fundamentals but more a valuation issue. Ten companies in the S&P 500 had nose bleed PE ratios (Facebook, Apple, Netflix and GOOGLE to name a few). These valuations were not sustainable and these companies affected the broader market in the pull back. Expensive stocks became more expensive and cheaper stocks became cheaper.
YTD all market indexes are up sharply. Through April 29th the S&P 500 is up 18% and the DOW is up 14.57% (Source First Trust). Several of those same 10 stocks have once again become more expensive. Waiting out the storm did prove to be the correct decision.
I just returned from SEI’s Advisor meeting in Scottsdale. At these meetings we have the privilege of listening to the top managers for SEI. Below is a quick summary of their main points:
- Inflation is a risk that is managed in investor portfolios. However, they don’t see inflation as a major issue at this time.
- They believe commodities may have upside potential should there be positive developments on trade and China stimulus. China and emerging markets may be starting to break out.
- SEI believes a cyclical change is occurring between Active and Passive investing. Passive has benefited from a narrow market. They believe a shift in focus on fundamentals and security selection is occurring. Additionally, they believe value investing and equity selection is more important going forward.
- Valuations in emerging markets continue to be attractive.
- The flat yield curve is a “yellow light” on the economy, not a certain forecast of pending recession.
- Corporate bonds can offer opportunity in a low inflation, moderate growth environment.
- Asset Allocation drives 94% of the variation in returns and diversification is the key.
SEI also went over methods they employ to reduce portfolio risk. They discussed how their Multi-Asset, Managed Volatility, Multi-Asset Inflation and fixed income funds continually make changes in allocation to reduce risk and take advantage of lower valuations of certain sectors.
Cyber Security; SEI had a presentation on how they keep their data secure. Not being much of a tech person I was impressed and relieved at the levels of encryption, testing and safety nets that provide data security. They hire several companies including a team from IBM that attacks their systems to find vulnerabilities and weaknesses. Listening to the IBM team leader was impressive.
According to Tealwood Asset Management’s latest webinar, they sing the same tune. Their research indicates 90% of the S&P 500 is fairly priced and 10% is very expensive. They also believe that security selection and asset allocation is key using active not passive management. The first four months of 2019 has been the best since 1999. Tealwood compared several years when the first four months had similar performance to what happened for the balance of the year. They illustrated how the balance of the year returns were more moderate. In other words, when the market goes up 18% in the first four months it’s not realistic to assume this pace will continue. Again, asset allocation and security selection (less expensive stocks) is key.
Below is a synopsis of my research. Although mostly positive it must be said that investing does have risks as well as rewards. At times events can come out of the blue that provide disruption and anxiety. Those times also provide opportunity. If you don’t like the market now wait six months to a year and the weather will most likely have changed.
- GDP numbers were released yesterday and came in at 3.2% significantly higher that estimates of 1.6%.
- Corporate profits are healthy.
- Developed Europe is still struggling. Economic prospects remain poor although there are some indications of stabilization.
- Economic data from Emerging Asia is showing signs of improvement. China-US trade negotiations will hopefully not end in a more damaging trade war. Completion of a trade agreement appears to be more likely.
- The Federal Reserve most likely will pause additional rate hikes.
- According to City National Rochdale; “The recovery in stocks has been justified by fundamentals and they see few warning sings signaling a recession or the end of the bull market. However, the pace of recent gains is likely to moderate and a consolidation period or pullback is possible over the coming months”. They go on to say that “Over the current bull market we have seen five 10%+ corrections. The driving force behind each rebound has been the same – an expanding economy, earnings growth and low interest rates”.
- As I stated in March of 2018 comment, when the market has a dramatic up-tick in the first few months it is more realistic to assume volatility will return and a higher potential for a pull back. With that said, as long as the fundamentals remain strong these pull backs are necessary and have always been a part of investing.
Thanks for reading. If you have any questions as always don’t hesitate to give us a call.
G. Pete Fields, CLU, ChFC
Chartered Financial Consultant
The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee any future results.