Adelglass Wealth Management https://adelglasswealth.com Wed, 26 Jun 2019 05:46:59 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 https://adelglasswealth.com/wp-content/uploads/sites/31/2019/03/cropped-logofinal-1-32x32.jpg Adelglass Wealth Management https://adelglasswealth.com 32 32 Midyear Outlook 2019: Client Letter https://adelglasswealth.com/midyear-outlook-2019-client-letter/ https://adelglasswealth.com/midyear-outlook-2019-client-letter/#respond Tue, 25 Jun 2019 03:02:44 +0000 https://adelglasswealth.com/midyear-outlook-2019-client-letter/ LPL Research believes that even as investors face prospects for periodic bouts of volatility, emphasizing fundamentals will remain critical for making effective investment decisions...

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We are pleased to announce the release of the LPL Research Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets, with investment insights and market guidance through the end of 2019.

LPL Research believes that even as investors face prospects for periodic bouts of volatility, emphasizing fundamentals will remain critical for making effective investment decisions. The LPL Research Midyear Outlook 2019 provides updated views of current fundamentals that should persist as shorter-term concerns fade and emphasizes four primary pillars for fundamental investing — policy, the economy, fixed income, and equities. As headlines change, look to these pillars and the LPL Research Midyear Outlook 2019 to help provide perspective on what really matters.

Progress on trade remains a key theme to watch. We continue to believe economic (and political) self interest will bring the United States and China back to the table, although risks have increased. Clarity on cross-border transactions should lead to increased business confidence, higher capital investment, and improved productivity, likely extending economic and profit cycles.

Against this backdrop, progress on trade remains central to growth projections, and with negotiations stalling in the second quarter, we have slightly reduced our 2019 gross domestic product (GDP) forecast to 2.25 – 2.5%, supported by consumer spending, business investment, and government spending.

Turning to the bond market, we expect higher yields from current levels. Considering the Federal Reserve (Fed), inflation, and our expectation for progress on trade, we now look for the 10-year Treasury yield to reach the 2.5 – 2.75% range in the next 6 to 12 months. Given signals from the yield curve as well as several weaker economic reports, we suspect the Fed will be more accommodative in coming quarters.

Based on expectations for economic growth and monetary policy, along with the fiscal tailwinds of government spending, reduced regulation, and lower taxes, we believe 2019 may still be a good year for equity investors. Accordingly, we see the potential for 5 – 6% earnings per share (EPS) growth in the S&P 500 Index during 2019, and we think the S&P 500 would be fairly valued around 3,000. We will revisit this forecast if clarity on trade and monetary policy result in an improved outlook for corporate profits.

Although the economic environment has become more challenging, the pillars of fundamental investing still appear sound to us. We will continue to monitor the impact of trade developments, and the LPL Research Midyear Outlook is here to provide insightful commentary to support investment decisions during 2019. If you have any questions, please reach out to your trusted financial advisor.

Click here to download a PDF of this report.

 

IMPORTANT INFORMATION

Please see the full Midyear Outlook 2019 publication for additional description and disclosure.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

DEFINITIONS

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-865246

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Midyear Outlook 2019: What Really Matters in the Markets https://adelglasswealth.com/midyear-outlook-2019-fundamental-how-to-focus-on-what-really-matters-in-the-markets/ https://adelglasswealth.com/midyear-outlook-2019-fundamental-how-to-focus-on-what-really-matters-in-the-markets/#respond Mon, 24 Jun 2019 21:43:44 +0000 https://adelglasswealth.com/midyear-outlook-2019-fundamental-how-to-focus-on-what-really-matters-in-the-markets/ Our Midyear Outlook 2019 provides our updated views of current fundamentals and the things that should persist as shorter-term concerns fade, and emphasizes our four primary pillars for fundamental investing—policy, the economy, fixed income, and equities.

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At the halfway point of 2019, the U.S. economy has held steady, supported by the fiscal stimulus we have highlighted for two years, and corporate profits continue to grow. At the same time, trade tensions are increasingly weighing on the economic outlook, while slowing global growth and political uncertainty have forced global central bankers to extend extraordinary levels of support.

We are still navigating a challenging environment. Investing comes with uncertainty, and market volatility can be alarming, but we continue to encourage investors to look beyond short-term market stresses and consider the real drivers of investment returns, as we believe that mindset may be a key to achieving long-term financial goals.

Our Midyear Outlook 2019 provides our updated views of current fundamentals and the things that should persist as shorter-term concerns fade, and emphasizes our four primary pillars for fundamental investing—policy, the economy, fixed income, and equities. As the headlines change daily, look to these pillars and LPL Research’s Midyear Outlook 2019 to help provide perspective on what really matters in the markets.

Click here to download a PDF of this report.

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Portfolio Compass | June 19, 2019 https://adelglasswealth.com/portfolio-compass-june-19-2019/ https://adelglasswealth.com/portfolio-compass-june-19-2019/#respond Thu, 20 Jun 2019 22:09:24 +0000 https://adelglasswealth.com/portfolio-compass-june-19-2019/ We maintain our year-end 2019 fair value target for the S&P 500 Index of 3,000. Despite a slight reduction in our 2019 S&P 500 earnings forecast and heightened trade tensions...

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COMPASS CHANGES
  • Bank loans view lowered from Neutral to Negative/Neutral
  • Industrial metals view lowered from Neutral to Negative/Neutral

INVESTMENT TAKEAWAYS

  • We maintain our year-end 2019 fair value target for the S&P 500 Index of 3,000. Despite a slight reduction in our 2019 S&P 500 earnings forecast and heightened trade tensions, we maintain our market weight equities recommendation.*
  • We maintain our slight preference for value due to attractive relative valuations after a sustained period of growth outperformance.
  • We expect a transition to large cap market leadership and away from small cap stocks in 2019 as the economic cycle ages.
  • We favor emerging markets (EM) equities for their solid economic growth trajectory, favorable demographics, attractive valuations, and our continued expectation that the United States and China will reach a trade agreement in the coming months.
  • Slower but still solid economic growth and modest inflationary pressure may be headwinds for fixed income. However, the pause by the Federal Reserve (Fed) and potential for a summer rate cut reduce the near-term risk of higher short-term interest rates.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment-grade corporates (IGC) and mortgage-backed securities (MBS) over Treasuries. MBS provide a diversifying source of yield within the investment-grade space, while economic growth is supportive of IGCs.
  • The S&P 500 remains in a sideways trend, giving technical confirmation to our market-weight stance for U.S. equities. While breadth remains strong, defensive sectors continue to lead the market, and we will likely need to see a rotation to cyclical stocks for equities to deliver significant upside in the near term.

Click here to download a PDF of this report.

 

IMPORTANT DISCLOSURES

All performance referenced is historical and is no guarantee of future results.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies.

All indexes 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.

Stock and Pooled Investment Risks

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a falling market.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

The prices of small and mid cap stocks are generally more volatile than large cap stocks.

Bond and Debt Equity Risks

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Alternative Risks

Event-driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.

Managed futures strategies use systematic quantitative programs to find and invest in positive and negative trends in the futures markets for financials and commodities. Futures and forward trading is speculative, includes a high degree of risk that the anticipated market outcome may not occur, and may not be suitable for all investors.

INDEX DEFINITIONS

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Barclays U.S. Municipal Bond Index covers the U.S. dollar-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

DEFINITIONS

A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest rate risk or reward for bond prices.

Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

The simple moving average is an arithmetic moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

The Beige Book is a commonly used name for the Federal Reserve’s (Fed) report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the Federal Open Market Committee (FOMC) meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.

Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with Fundamental analysis within the decision-making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.

Beta measures a portfolio’s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark.

Idiosyncratic risk can be thought of as the factors that affect an asset such as a stock and its underlying company at the microeconomic level. Idiosyncratic risk has little or no correlation with market risk, and can therefore be substantially mitigated or eliminated from a portfolio by using adequate diversification.

This Research material was prepared by LPL Financial, LLC

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-XXXXXX

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Stocks and Fed Rate Cuts | Weekly Market Commentary | June 17, 2019 https://adelglasswealth.com/stocks-and-fed-rate-cuts-weekly-market-commentary-june-17-2019/ https://adelglasswealth.com/stocks-and-fed-rate-cuts-weekly-market-commentary-june-17-2019/#respond Tue, 18 Jun 2019 03:18:38 +0000 https://adelglasswealth.com/stocks-and-fed-rate-cuts-weekly-market-commentary-june-17-2019/ Stocks have benefited recently from increasing hopes of a Fed rate cut, although investors probably won’t get one this week...

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KEY TAKEAWAYS
  • Stocks have benefited recently from increasing hopes of a Fed rate cut, although investors probably won’t get one this week.
  • Stocks’ historical performance after initial Fed rate cuts has been mostly positive, but it has been greatly dependent on the business cycle.
  • We prefer to see the market stand on its own and take more direction from generally solid fundamentals of economic growth and corporate profits.

Click here to download a PDF of this report.

A potential rate cut may give stocks a lift. Stocks have benefited recently from increasing hopes of a Federal Reserve (Fed) rate cut, pulling the S&P 500 Index back to within 2% of its record high set on April 30, as of June 14. On June 4 Fed Chair Jay Powell signaled a possible cut by saying “we will act as appropriate to sustain the expansion,” and since then, as of Friday, June 14, 2019, the S&P 500 is up 5.4%. The central bank’s verbal pivot, partly an acknowledgement that they must be ready to offset trade tensions, has pushed the odds of a rate cut in July from roughly 60% to 86%, based on the fed fund futures market. So what might a cut mean for stocks?

WILL THE FED CUT?

It’s been a while since we’ve talked about rate cuts. After last cutting rates in 2008, the Fed started hiking rates in 2015 and has raised them a total of nine times since then. Now, amid the longest economic expansion ever recorded in U.S. history, the bond market is aggressively pricing in not one but two rate cuts this year.

Although the bond market may be overdoing it by pricing in two cuts this year, the latest growth and inflation data, along with U.S.-China trade tensions, provide cover for the Fed to lower rates this summer. In particular, the May jobs report was soft, inflation is below the Fed’s target and falling, and headlines suggest that a trade breakthrough at the G-20 in Japan at the end of June has become increasingly difficult to achieve.

Bottom line, we don’t believe that current economic conditions justify a Fed rate cut this week, but we will probably get a signal from Powell that a cut is likely coming in July (we now see a July cut as more likely than not). Fed policy is too tight for a prolonged trade war, while the bond market is forcing the Fed’s hand to an extent, amid slowing growth and depressed interest rates globally.

WHAT MIGHT A CUT MEAN FOR STOCKS?

As we wrote in last week’s Weekly Economic Commentary, if the Fed cuts rates in June or July, we would view it as a course correction and not a precursor to an imminent recession. However, the last two starts to easing cycles (a cut in rates after a series of hikes) in January 2001 and September 2007 immediately preceded recessions. Those business cycles were about to end (tech bubble and financial crisis), and Fed policy was clearly too tight heading into those recessions. Where we are in the business cycle matters a lot.

Looking further back in history, however, reveals a more encouraging picture that is consistent with a mid-cycle pause. As you can see in Figure 1, after the five initial rate cuts before 2001 (1984, 1987, 1989, 1995, and 1998), the S&P 500 rose an average of 11.1% and 15.8% over the subsequent 6 and 12 months, respectively. We think these cases provide better comparisons to today’s environment.

Even including the poor stock market performance after the 2001 and 2007 cycles, the average S&P 500 gains over subsequent 6 and 12 months were a respectable 4.5% and 5.8%.

Wall Street’s favorite analogy for this environment might be the 1995 “insurance cut,” when the Fed cut rates by 25 basis points (0.25%) twice that year. At that point, the expansion was four years old, growth was solid, and the stock market was doing well. After the Fed’s first cut in July 1995, the expansion lasted almost six years longer. One could draw a parallel between the Mexican peso crisis in 1994 and today’s trade tensions, although the relatively stronger economy and early-stage internet boom are among the key differences to consider.

The rate cut in 1998 offers another promising analogy to today’s Fed environment. The U.S. economy was late in the cycle in a very long expansion then—as we probably are now (though hopefully not quite as late)—and the economic cycle and bull market lasted a couple of more years after the 1998 initial cut. We had crises then too, notably the collapse of hedge fund Long Term Capital Management, and problems internationally, in particular the Asian currency and Russian debt crises. But again, the lack of euphoria—dot-com or otherwise—offers a stark contrast.

We could also make a reasonable comparison to the waves of quantitative easing in the years following the financial crisis and the pausing of the Fed’s rate hike campaign in 2016. Stocks responded positively to more stimulus then as they have so far in this cycle.

CONCLUSION

Slower growth, tariffs, ongoing trade tensions, low inflation, and bond market positioning have given the Fed cover for a rate cut. Taking some of the upward pressure off the U.S. dollar provides additional incentive. We don’t think the Fed will cut rates this week, but a July cut is a strong possibility. We expect stocks to applaud an eventual cut and break out to new highs later this year. Trade disputes could throw a wrench in that plan, but we continue to believe that additional economic pain experienced by both the United States and China will bring the two sides together to strike some sort of a deal this summer. We think it will be the same story with Europe and Japan if we get auto tariffs.

Stocks’ historical performance after initial Fed rate cuts has been mostly positive, but it has been greatly dependent on the business cycle.

Our belief that this cycle has more left in it supports comparisons to the initial rate cuts in the mid- and late-1990s rather than the cuts in 2001 and 2007.

We prefer to see the market stand on its own and take more direction from the fundamentals of economic growth and corporate profits. We think fundamentals generally look good here, which we discuss in detail in our Midyear Outlook 2019 slated for release one week from today. Until we get clarity on trade, we’ll gladly take the help.

 

IMPORTANT DISCLOSURES

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.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All indexes 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.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-863987

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Setting The Stage | Weekly Economic Commentary | June 17, 2019 https://adelglasswealth.com/setting-the-stage-weekly-economic-commentary-june-17-2019/ https://adelglasswealth.com/setting-the-stage-weekly-economic-commentary-june-17-2019/#respond Tue, 18 Jun 2019 01:49:56 +0000 https://adelglasswealth.com/setting-the-stage-weekly-economic-commentary-june-17-2019/ The Federal Reserve’s (Fed) next policy meeting starts June 18 with a policy announcement due June 19...

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KEY TAKEAWAYS
  • The Federal Reserve is scheduled to announce its next policy decision June 19.
  • We think a language change is more likely than a policy change at this meeting.
  • Economic fundamentals are still sound, but the Fed must address plans to mitigate trade risk.

Click here to download a PDF of this report.

These next two weeks are pivotal for the global economy. The Federal Reserve’s (Fed) next policy meeting starts June 18 with a policy announcement due June 19. In the following week, global leaders will convene at the G-20 Summit in Japan, and we’ll likely get clues on the state of the U.S.-China trade talks.

Fed fund futures are pricing in about a 20% chance of a rate cut at the upcoming meeting [Figure 1]. We think a rate cut could be in play later this year if global conditions deteriorate, but a policy change at this next meeting may be too soon. Regardless, Fed commentary on the state of the economy and policy has been critical for markets lately, and we expect policymakers to address their plans to mitigate risks of a trade-related slowdown.

SLOWING INFLATION

Last week’s inflation data reflected the trade dispute’s growing strain on the U.S. economy. Year-over year growth in the core Consumer Price Index (excluding food and energy prices) slowed to a 14-month low. Core Producer Price Index growth fell to a 16-month low, and wage growth declined to a nine-month low. Most importantly, core personal consumption expenditures (PCE),the Fed’s preferred inflation gauge, sits about 40 basis points (0.40%) below policymakers’ 2% target. The recent slowdown has been discouraging, even though inflation gauges haven’t fallen to alarming levels. We’re starting to see employer pricing pressures weaken though, a sign that catalysts for higher inflation could be fading.

Tepid inflation alone may be enough cover for the Fed to cut rates this year. However, it’s tough to gauge how much a rate cut could help stoke pricing pressures. Consumer inflation has been dragged down by acyclical goods, such as consumer goods and services, according to Fed Bank of San Francisco data. Pricing pressures from acyclical goods can’t be easily influenced by policy, as acyclical inflation doesn’t necessarily correlate with economic activity or the business cycle. Logically, lower rates should boost demand in more cyclical parts of the economy, such as housing. Economic data are still sound on balance, but there are more signs that growth could slow if the U.S.-China trade dispute drags on. The bond market is also signaling that policy may be too tight for prolonged trade uncertainty. It’s a tricky environment, and the Fed may decide that cutting rates now may not justify the potential consequences.

LANGUAGE SHIFT

Still, it’s become painfully obvious that the Fed needs to address its plan to combat a potential slowdown from trade risk. At this point, we think the Fed will likely tweak its “patient” language in preparation for eventually adjusting policy if conditions continue to deteriorate. We’ve seen a similar measured approach from the Fed when making policy changes over the last several years, and it’s largely worked well. In the past month, policymakers have started to publicly acknowledge the possibility of a rate cut, and investors have reacted well to the Fed’s flexible language. The most telling example was Fed Chair Jerome Powell’s June 4 comment that policymakers “will act as appropriate to sustain the expansion,” which powered the S&P 500 Index to its best day since January. A language change could also reassure investors while buying the Fed more time to watch for G-20 developments and monitor incoming data. Of course, we don’t think the Fed should bow to markets in its policy decisions, but preparation is needed for a smooth transition.

The Fed will also release an updated dot plot, or summary of policymakers’ rate projections, as well as new economic and inflation projections. That information alone will be immensely helpful in preparing investors for a shift. Powell’s comments at the post-meeting press conference also will be useful in understanding the Fed’s thought process around these new projections and less quantifiable variables, like trade uncertainty. Unfortunately, that means investors could hang on every word Powell says, leading to more turbulence for the stock market.

At any rate, investors should view a rate cut as a course correction and not as a decision to get ahead of an imminent recession. Right now, we see fundamentals that increasingly point to slowing growth instead of a downturn. Historically, the Fed has had to adjust its rate path within an expansion when global events, the economy, or markets signal rates are too high for the current environment. Policy is at its tightest point of the cycle, but the Fed is mindful of trade-related consequences and willing to be flexible to keep growth stable.

CONCLUSION

We’re considering the Fed’s June meeting as policymakers’ chance to set the stage for future policy adjustment. The Fed may strike a more cautious tone in its commentary this week than its “patient” policy theme from the past few months.

As with any Fed meeting, we’ll be watching for any developments or changes in projections or language. If there are changes, we encourage investors to view them in the context of a solid macroeconomic environment but with increasing risk from trade uncertainty.

 

IMPORTANT DISCLOSURES

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.

The economic forecasts set forth in this material may not develop as predicted.

Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-864040 (Exp. 06/20)

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Market Insight Monthly | May 2019 https://adelglasswealth.com/market-insight-monthly-may-2019/ https://adelglasswealth.com/market-insight-monthly-may-2019/#respond Thu, 13 Jun 2019 04:17:38 +0000 https://adelglasswealth.com/market-insight-monthly-may-2019/ U.S. economic data improved in May on balance, even as investors battled a resurgence in U.S.-China trade tensions...

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ECONOMY: SIGNS OF ECONOMIC RESILIENCE IN MAY

U.S. economic data improved in May on balance, even as investors battled a resurgence in U.S.-China trade tensions.

Leading indicators signaled low odds of a recession in the coming year. The Conference Board’s Leading Economic Index (LEI) rose 2.7% year over year in April. As a reminder, April’s reading was its slowest pace of year-over-year growth since February 2017. Still, the LEI is squarely in positive territory, which shows that leading data are signaling growth.

A second glance at first quarter gross domestic product (GDP) provided respite for investors fixated on negative headlines. GDP rose 3.1% in the first quarter, according to the first revision released May 29. Although headline growth was revised down, it was still the biggest first-quarter GDP gain since 2015, showing the U.S. economy remained resilient against trade and political headwinds [Figure 1]. Inventories and net exports still accounted for about half of first quarter GDP growth, a temporary boost that could reverse in future quarters. Consumer spending’s contribution was revised slightly upwards, and business spending’s contribution was cut.

April jobs data showed U.S. hiring hasn’t wavered amid global uncertainty and trade tensions. Nonfarm payrolls growth exceeded estimates, while the unemployment rate fell to a cycle low. A separate report showed nonfarm productivity rose at the fastest year-over-year pace since 2010 in the first quarter, showing U.S. companies are prioritizing boosting output with current labor [Figure 2]. First-quarter unit labor costs rose at the slowest pace of growth since the fourth quarter of 2013. Overall, the U.S. labor market remains robust for this point in the cycle, with few signs of overheating or slowing.

Consumer inflation remained well contained. The core Consumer Price Index, which excludes food and energy, increased 2.1% year over year, rebounding from April’s 13-month low. Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in April, below policymakers’ 2% target.

Wage and producer price growth remained steady. Average hourly earnings grew 3.2% year over year in April, a level of growth that should continue to bolster consumer confidence and support consumer spending. The core Producer Price Index (PPI), which excludes food and energy prices, rose 2.5% year over year in April.

U.S. manufacturing continued to deteriorate last month as global demand softened amid trade tensions. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, dropped to the lowest level since October 2016. Markit’s PMI ticked up slightly in April, but preliminary May data showed the gauge fell further, and it’s less than a point from contractionary territory (below 50).

Confidence gauges rebounded, fueled by strong U.S labor market conditions. The Conference Board’s Consumer Confidence Index jumped to a six-month high in May, according to preliminary data; however, the cutoff date was May 16, so the data likely didn’t capture much of the fallout after the latest trade flare-up. National Federation of Independent Business’s (NFIB) measure of business confidence climbed to a year-to-date high in April.

Consumer and business spending data weakened, even as sentiment showed signs of recovery. Retail sales slid 0.2% in April after posting its biggest monthly gain since Sept. 2017 in March. New orders of nondefense capital goods slid 1% in April.

More Patience

Fed members unanimously voted to keep rates unchanged at the conclusion of their May policy meeting. Fed Chair Jerome Powell repeated several times in his May 1 post-meeting press conference that further policy patience is appropriate. Powell attributed lower consumer inflation to transitory factors, noting that core PCE growth stayed close to 2% for much of 2018. Still, markets are increasingly positioning for a rate cut before year-end, even amid the Fed’s patient messaging and faith in the economy.

Click here to download a PDF of this report.

 

IMPORTANT DISCLOSURES

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted. All performance referenced is historical and is no guarantee of future results.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

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Bull Market For Policy Uncertainty | Weekly Market Commentary | June 10, 2019 https://adelglasswealth.com/bull-market-for-policy-uncertainty-weekly-market-commentary-june-10-2019/ https://adelglasswealth.com/bull-market-for-policy-uncertainty-weekly-market-commentary-june-10-2019/#respond Tue, 11 Jun 2019 00:41:35 +0000 https://adelglasswealth.com/bull-market-for-policy-uncertainty-weekly-market-commentary-june-10-2019/ Last week stocks enjoyed their best week since November 2018 despite rampant policy uncertainty. Policy uncertainty remains high, particularly around trade, but you wouldn’t know it...

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KEY TAKEAWAYS
  • Policy uncertainty remains high, particularly around trade.
  • While it is good news that an agreement was reached with Mexico over the weekend to avoid those tariffs, a trade deal with China is unlikely until more economic pain is incurred by both China and the United States.
  • We have reduced our 2019 earnings estimates to acknowledge the increased risk of a prolonged trade conflict, though we remain above consensus estimates.

Click here to download a PDF of this report.

Last week stocks enjoyed their best week since November 2018 despite rampant policy uncertainty. Policy uncertainty remains high, particularly around trade, but you wouldn’t know it from last week’s stock market rally, which jumped 4.4% on increasing hopes for Federal Reserve (Fed) rate cuts. That jump brought the S&P 500 Index to within 2.5% of its April 30 record high. However, that doesn’t mean stocks are in the clear as the trade conflict with China continues.

POLICY UNCERTAINTY IS HIGH

We know policy uncertainty is high, but researchers have actually quantified it by creating a policy uncertainty index [Figure 1]. The U.S. version of this index, which counts words in news stories associated with economic and Washington, D.C., policy and tracks them over time, is high no surprise. The trade-policy-specific version of this index is similarly high and trending upward—no surprise there either. Our friends at Strategas Research Partners tell us that searches for “tariffs” on Bloomberg hit their highest level of President Trump’s presidency last week.

So where are we now with regard to trade uncertainty? First, we received some good news over the weekend as President Trump announced a deal with Mexico to avoid tariffs on Mexican goods. The agreement, which will be finalized over the next 90 days, calls for Mexico to commit resources to immigration enforcement.

Turning to China, the outlook is more muddled. We suspect that more economic pain will be inflicted on both countries, which ultimately will push the process forward. That pain, we believe, will eventually result in a trade agreement—hopefully by the end of the summer—but that is hardly assured. The good news is the two sides are talking again. U.S. Treasury Secretary Steven Mnuchin spoke to Chinese central banker Yi Gang at the G20 Finance Ministers meeting in Japan this weekend, and President Trump plans to talk to Chinese President Xi at the (broad) G20 in Japan later this month.

Even if the United States and China can resolve their differences, trade battles may not be over. President Trump may put tariffs on European and/or Japanese autos to extract concessions after a potential China deal.

Policy uncertainty is not just trade related. Monetary policy uncertainty has swung stocks around quite a bit recently. After last week’s disappointing jobs report that included a smaller-than-expected increase in wages, the odds of a July rate cut by the Fed jumped to more than 80%, based on what the bond market is pricing in. The longer China tariffs remain in place, the greater the chances of a rate cut. The Fed’s current monetary policy is probably too tight for a prolonged trade war.

Meanwhile, parts of the yield curve remain inverted, which will become increasingly concerning the longer it lasts. The 3-month/10-year spread currently is -0.19%, which historically has preceded stock market weakness by about nine months, if the inversion has persisted.

Finally, although it’s more than a year off, uncertainty surrounding the U.S. presidential election has begun to impact markets already, particularly healthcare stocks. Internationally, Brexit still has not been resolved, and Italy is again fighting with European regulators about its deficit spending.

REDUCING EARNINGS ESTIMATES

Despite the agreement with Mexico over the weekend, the odds of a prolonged trade war with China have increased. Whether companies pay the tariffs or shift supply chains to other countries to avoid them (we have seen plenty of evidence in economic data that this is already happening), costs could rise and profit margins could narrow. As long as the tariffs remain in place, earnings growth will be tougher to come by.

We think a reasonable worst-case scenario for tariffs in 2019 is in the $8–10 range of S&P 500 earnings per share. That implies a three-month delay could be worth $2–2.50 per share. Factoring in tariffs, ongoing trade uncertainty, and the related drag on business confidence and economic growth, we are reducing our 2019 S&P 500 earnings forecast from $172.50 per share to $170 [Figure 2].

Importantly, our forecast is still above consensus estimates of $168 per share (source: FactSet), and we still see upside potential depending on the path of China negotiations.

We have not changed our year-end fair value target on the S&P 500 of 3,000. We expect a slightly lower earnings figure will be offset by a marginally higher price-to-earnings ratio.

CONCLUSION

Policy uncertainty is high, especially on trade. We have reduced earnings estimates to acknowledge the increased risk of a prolonged trade conflict. We remain optimistic that these trade disputes can be resolved this summer, though probably not until more economic pain is inflicted on the U.S. and China economies.

That doesn’t mean stocks won’t add to last week’s gains. We remain confident in our forecast for year end fair value on the S&P 500 in the range of 3,000. It may be a grind as the U.S. economy muddles along, but fundamentals for equities remain favorable.
 
IMPORTANT DISCLOSURES

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.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All indexes 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.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

DEFINITIONS

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

Forward price to earnings (Forward P/E) is a measure of the price-to-earnings ratio (P/E) using forecasted earnings for the P/E calculation.

INDEX DESCRIPTIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

If you are receiving investment services out of a bank or credit union, please note that this financial institution is not a registered broker/dealer, and is not an affiliate of LPL Financial. The investment products sold through LPL Financial are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-861823

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A Record-Long Expansion | Weekly Economic Commentary | June 10, 2019 https://adelglasswealth.com/a-record-long-expansion-weekly-economic-commentary-june-10-2019/ https://adelglasswealth.com/a-record-long-expansion-weekly-economic-commentary-june-10-2019/#respond Tue, 11 Jun 2019 00:00:17 +0000 https://adelglasswealth.com/a-record-long-expansion-weekly-economic-commentary-june-10-2019/ The economic expansion just turned 10 years old, tied for the longest on record, according to the National Bureau of Economic Research....

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KEY TAKEAWAYS
  • This economic expansion is now one of the longest on record.
  • Trade tensions have threatened growth, but economic data still appear sound.
  • If the trade dispute continues, the Fed could be forced to intervene.

Click here to download a PDF of this report.

The economic expansion just turned 10 years old, tied for the longest on record, according to the National Bureau of Economic Research. It’s only fitting with this milestone that economic skepticism is peaking once again. Many investors, especially in the bond market, have been bracing for an economic slowdown and calling for Federal Reserve (Fed) intervention as global trade disputes rattle financial markets [Figure 1].

The trade situation is unnerving, and we’re aware an escalation could eventually wear on an aging expansion. It’s important to remember, though, that with sound fundamentals and a measured Fed, the U.S. economy has navigated several global crises in this cycle. We think both supportive factors are still in place.

ANOTHER SPEED BUMP

The current economic expansion has been slow and mostly steady, a feature that has led to its longevity. Real gross domestic product (GDP) has grown at an average rate of 2.3% since the expansion began in June 2009, the slowest inflation-adjusted pace for all expansions since the 1970s. Growth over the past several years has been hampered by bouts of global volatility: the European debt crisis, the U.S. debt downgrade, and the collapse of oil prices (to name a few). Conditions felt dire in each crisis, but the U.S. economy powered through each time.

May’s weaker-than-expected payrolls growth stoked fears that trade tensions had finally infiltrated labor markets. Nonfarm payrolls rose by 75,000 in May, according to the jobs report released June 7, far below consensus estimates for a 175,000 increase. Job gains for March and April were also revised down by 75,000.

Even though it’s tough to be optimistic about the May jobs data, we don’t see the data as a reason to panic. Payroll gains have averaged around 200,000 per month over the last year, a solid pace for this point in the cycle, and slowing job creation is typical for a tightening labor market [Figure 2]. We also see strength in other job-market indicators, showing that the May stumble in payrolls may not be as disappointing as it was at first glance.

Manufacturing data released last week were more concerning, as the Institute for Supply Management’s (ISM) Purchasing Managers’ Index fell to the lowest level since October 2016. Even though we’d like to see more manufacturing strength, we’ve seen this story play out before. The ISM gauge has dipped into contractionary territory (below 50) three other times in the current expansion. Each time, manufacturing rebounded as global issues were resolved.

COURSE CORRECTION

Economic data were a little shaky last week, but the Fed swooped in to calm investors’ nerves. On June 4, the S&P 500 Index rose the most since January after Fed Chair Jerome Powell commented that policymakers “will act as appropriate to sustain the expansion” in light of recent trade developments. Investors interpreted this as the Fed’s willingness to cut rates if needed, although his words were vague enough for us to think they were more of a communication tactic than a commitment to a policy change.

On balance, economic data haven’t deteriorated enough to warrant a Fed rate cut, in our view. However, there have been signs that growth could slow over the coming quarters, and trade uncertainty may be the primary risk to an otherwise solid economic outlook. The bond market also has signaled increasingly that policy may be too tight for an economy hampered by a drawn-out trade dispute. Eventually, the Fed may have to intervene by lowering interest rates.

If the Fed cuts, investors should view it as a course correction and not as a decision to get ahead of an imminent recession. It hasn’t been unusual in the past for the Fed to adjust its rate path within an expansion when global events, the economy, or markets signal rates are too high for the current environment. A course correction, or rate cut after policy tightening, has been more typical than what recent history shows. In the last economic cycle, the Fed’s first course correction didn’t occur until about four months before the recession started in January 2008. In every other expansion since 1970, however, the Fed has made at least one course correction in the first half of the cycle.

Wall Street’s favorite analogy for this environment is the 1995 “insurance cut,” when the Fed cut rates by 25 basis points (0.25%) twice that year amid fears of overtightening. At that point, the expansion was four years old, and growth was moderating (but still solid). After the Fed’s first cut in July 1995, the expansion lasted almost six years longer. Six more years for this expansion would be a surprise, but we see several similarities now to the environment that existed during the 1995 rate adjustment.

CONCLUSION

The expansion has reached its 10th birthday, thanks to one of the slowest recoveries in history and a steady stream of accommodative monetary policy. Right now, we see fundamentals that are sound enough to avoid a recession. Monetary policy is at its tightest point of the cycle, but Powell’s comments this week reminded us that the Fed is mindful of trade-related economic consequences and willing to be flexible to keep growth stable.

After 10 years, it’s not surprising that we’re seeing signs we’re late in the economic cycle. History has proven, though, that later-cycle economies can continue to exhibit stable growth for years. We’ll continue to watch trusted economic and market signals for threatening signs of slowing or excesses.

 

IMPORTANT DISCLOSURES

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.

The economic forecasts set forth in this material may not develop as predicted.

Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

If you are receiving investment services out of a bank or credit union, please note that this financial institution is not a registered broker/dealer, and is not an affiliate of LPL Financial. The investment products sold through LPL Financial are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-861749 (Exp. 06/20)

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Trade and Tariffs | Client Letter | June 6, 2019 https://adelglasswealth.com/trade-and-tariffs-client-letter-june-6-2019/ https://adelglasswealth.com/trade-and-tariffs-client-letter-june-6-2019/#respond Fri, 07 Jun 2019 03:13:16 +0000 https://adelglasswealth.com/trade-and-tariffs-client-letter-june-6-2019/ Our June letter discusses the U.S.-China trade dispute, tariffs on Mexican imports, and the possible effects on financial markets.

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Trade tensions have interrupted an unusually calm year in U.S. stocks. In May, the S&P 500 Index fell from an April 30 record high as the United States and China failed to reach a trade deal and escalated tariff tensions. The United States also proposed new tariffs on Mexico, further complicating the outlook for trade. The sudden turnaround in trade talks has surprised investors and rattled global financial markets.

While a resurgence in trade tensions is unnerving, we encourage investors to pause and consider the fundamental implications of increasing tariff rates. Higher tariffs and other retaliatory measures could potentially weigh on economic activity and inflation, but we don’t expect the escalation to derail this expansion. In the worst-case trade scenario, gross domestic product (GDP) growth could be closer to 2% this year. While slower, that pace of growth is largely consistent with the average pace over the last decade.

It’s also still possible that the United States and China can avoid further trade escalation, since it appears the bulk of the agreement is already in place. We remain hopeful that the United States and China will reach some kind of a trade agreement—or at least a trade truce—in the next few months. We also expect that trade issues with Mexico
will likely be resolved sometime this summer.

There has been a lot of fear-based decision-making in markets. Some nervousness is understandable, but current concerns on tariff impacts look overblown. We suspect there may be more bouts of volatility ahead as President Trump and China President Xi pursue a new path to compromise. In the end, we expect a deal that should help support continued growth in the United States and global economies.

We also expected some stock market weakness after such a strong start to the year. While it’s felt like an especially turbulent month, the S&P 500’s decline has been relatively modest compared to previous experiences.

The United States economy continues to grow at a solid pace, and job creation is steady. Wages are rising at a healthy rate, and some benefits of tax reform and fiscal spending are still supporting demand. Earnings growth has also been better than feared, and we think S&P 500 companies could easily exceed low profit expectations the rest of this year. Ultimately, we think earnings growth and solid fundamentals could drive the S&P 500 to new highs later in 2019.

It’s important to remember that stocks’ rally is still intact, and pullbacks like the most recent one are normal events over the long term. While near-term volatility can be uncomfortable, it has helped curb excesses in the markets and sustain healthy sentiment, allowing for what is now the longest bull market on record. Volatility may also provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or add to equity positions.

We wish you a pleasant and safe summer, and we encourage you to contact your trusted financial advisor if you have any questions.

Click here to download a PDF of this report.

 
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. 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. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

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The Baffling Bond Market | Weekly Economic Commentary | June 3, 2019 https://adelglasswealth.com/the-baffling-bond-market-weekly-economic-commentary-june-3-2019/ https://adelglasswealth.com/the-baffling-bond-market-weekly-economic-commentary-june-3-2019/#respond Tue, 04 Jun 2019 05:03:20 +0000 https://adelglasswealth.com/the-baffling-bond-market-weekly-economic-commentary-june-3-2019/ Economic fundamentals still look sound, even as yields send cautious signals.

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KEY TAKEAWAYS
  • The 10-year Treasury yield has declined at a rapid pace.
  • Economic fundamentals still look sound, even as yields send cautious signals.
  • Investors around the world have rushed into Treasuries for income, safety, and liquidity.

Click here to download a PDF of this report.

The bond market has been baffling recently. While U.S. stocks surged earlier this year, the 10-year Treasury yield quietly crept lower, puzzling market participants as the typical relationship between stocks and bonds (higher stock prices, higher yields) broke down at a rapid pace.

Then, the alligator jaws snapped shut. The S&P 500 Index has dropped about 6% since reaching a record high on April 30, and the decline of long-term government bond yields across the globe picked up speed [Figure 1]. Last week, the 10-year yield posted its biggest weekly drop in over four years to close at a 20-month low of 2.12%, and parts of the yield curve have flipped back into inverted territory (long-term rates falling below short-term rates).

The bond market’s excessive pessimism has commanded Wall Street’s attention, and we’ve seen several interpretations of Treasuries’ cautious undertones. We’ll sort through a few of them below.

ECONOMIC PROSPECTS

The bond market has a reputation as one of the best predictors of economic prospects, so the recent drop in long-term yields has fueled recession fears.

To be fair, there is evidence of weakness in economic data. Recent durable goods orders, industrial production, and manufacturing data have shown that global demand continues to soften. Some of the 10-year yield’s biggest drops this month occurred on days these reports were released.

The bulk of economic fundamentals don’t support a 10-year yield nearing 2%, though. The economy has been growing at a 3% rate, according to last quarter’s gross domestic product (GDP) growth; wage growth is healthy; and the U.S. labor market is close to full employment.

We also haven’t seen signs of stress in other fixed income indicators. The spread between the 2-year and 10-year yields increased last week and remains squarely in positive territory, and corporate debt spreads have been relatively contained. We’d expect to see more deterioration across credit markets if a recession were imminent.

SAFE HAVEN TRADING

U.S. economic fundamentals look sound, but the rest of the world has struggled with signs of slowing this year. Trade and political headwinds have weighed on the global economy, and the most recent escalation in trade discord has been overwhelming for sovereign debt rates. The 10-year German bund yield is hovering around a record low,
and the amount of negative-yielding global debt has climbed above $11 trillion [Figure 2].

Because of this, global investors have piled into Treasuries at an increasing rate as they search for income, safety, and liquidity. Global stocks’ recent slide has also sparked a safe-haven rush into Treasuries as investors look to hedge stock losses.

Fixed income investors’ insatiable appetite for Treasuries could be a product of global uncertainty, and we expect it to continue as trade tensions between the United States and China remain elevated. We see a high chance of some negotiation on the horizon—maybe not a trade deal, but at least a trade truce that allows discussions to get back on track. If this happens, we’d expect stabilizing global growth to help support yields worldwide.

RATE CUT POSITIONING

Trade and political headwinds have understandably spooked investors, and they’ve increasingly positioned for Federal Reserve (Fed) rate cuts.

The 2-year yield has dropped more than 50 basis points (0.50%) below the upper-bound fed funds rate, and fed fund futures are now pricing in a near certain chance of a lower policy rate by year-end. Even though short-term yields are more reflective of monetary policy, the growing consensus for loosening policy has weighed on the entire Treasury curve.

We don’t see the argument for a lower policy rate should trade tensions improve, which remains our base case. However, a protracted trade dispute could further weigh on growth and justify a cut. The Fed has already communicated a pause in policy adjustments until there is greater clarity on global conditions, which we think could come from U.S.- China trade progress. Clarity on trade should lead to a resurgence in business and consumer demand, which would eventually necessitate tighter policy— perhaps not in 2019, but later in this economic cycle.

The Fed has repeatedly said policy decisions are data-dependent. While policymakers consider financial markets in their deliberations, they ultimately operate under a dual mandate of stable inflation and maximum employment (with an unofficial third mandate of global stability). It’s tough to make a case for lower rates with over 3% GDP growth, healthy wage growth, and a labor market close to full employment. The Fed also understands that any cut
now would reduce its ability to adjust policy when a recession does materialize.

If the United States and China come back to the table, we would expect stabilizing growth expectations to fuel
a reversal in rate cut positioning and a rebound in yields.

CONCLUSION

One of our biggest challenges this year has been explaining a bond market that’s become increasingly pessimistic on the economic outlook. In any case, we encourage investors not to get too caught up in Treasuries’ cautious signaling. We see plenty of evidence that solid U.S. fundamentals are intact, and we don’t think yields’ recent decline is simply an indictment of future economic growth. We think the most plausible explanation here is that intensifying trade and political risks have ignited a wave of panic buying in U.S. debt, a trend we expect to reverse as trade risk subsides.

 
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The economic forecasts set forth in this material may not develop as predicted.

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All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed bythe U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

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The post The Baffling Bond Market | Weekly Economic Commentary | June 3, 2019 appeared first on Adelglass Wealth Management.

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