The Three Big Things
Market Update
(all values as of 03.29.2024)

Stock Indices:

Dow Jones 39,807
S&P 500 5,254
Nasdaq 16,379

Bond Sector Yields:

2 Yr Treasury 4.59%
10 Yr Treasury 4.20%
10 Yr Municipal 2.52%
High Yield 7.44%

YTD Market Returns:

Dow Jones 5.62%
S&P 500 10.16%
Nasdaq 9.11%
MSCI-EAFE 5.06%
MSCI-Europe 4.60%
MSCI-Pacific 5.82%
MSCI-Emg Mkt 1.90%
 
US Agg Bond -0.78%
US Corp Bond -0.40%
US Gov’t Bond -0.72%

Commodity Prices:

Gold 2,254
Silver 25.10
Oil (WTI) 83.12

Currencies:

Dollar / Euro 1.08
Dollar / Pound 1.26
Yen / Dollar 151.35
Canadian /Dollar 0.73

Profit  – US GDP growth  is expected to continue at a healthy rate of 2-3% in 2019, subsidized in part by the shift of business  to the U.S. from those countries with higher taxes, tariffs, and energy costs.
While earnings have slowed after the initial “pop” of the tax law changes, those changes are not going away for at least two more years.  Corporate tax rates are not going back up …and pre-tax corporate profits in 2018 were the highest in 30 years. That growth is slowing; not reversing.  Corporate tax rates have gone from being the highest in 10 of the largest economies, to fifth; driving some businesses to relocate to the U.S. where it costs less to do business.

We now have the lowest average tariff rates of our 10 largest trading partners.

U.S. Energy exports exceeded imports in 2018 while gas prices here remain lower than most of the last decade, resulting in increased consumption – not only of energy but of discretionary goods and services as well.  … all while significantly reducing the aggregate emissions of 6 common pollutants including CO2!

Both manufacturing output and manufacturing employment have increased steadily since 2010.
(Source: Federal Reserve Board.  Bureau of Economic Analysis. US Energy Information Administration (EIA).  Bureau of Labor Statistics

Liquidity – Credit markets are starting to get more conservative
While corporate liabilities have also grown (20 trillion), non-financial corporate assets available to offset that debt are more than twice the amount owed(> 40 trillion).  Bank lending standards appear to be tightening.  While this is not critical, it may be an indication that investors should be taking less risk.

The yield curve inversions have been brief and the Fed responded dovishly. Trends are growing more negative but the immediate risk of recession remains low.

Sentiment – Participate and Protect!
Right now, we are not seeing the signals of a potential recession.  However, outside of the stock market, there are growing signs of weakness in consumer confidence, liquidity is drying up, and the Fed has signaled some concern for a slowing economy.   Yet markets  in the first quarter have responded with counter-intuitive bullishness.  Investors had been overly cautious while the economy purred along and the market achieved new, sustainable levels.  Now, 10 years in, investors are becoming bulls when they should be reasonably cautious.

Individual equities are overpriced, not yet reflecting the deceleration of earnings. But now is neither the time to “take our marbles and go home”, nor to “go all-in”.

Each KCG client has developed an Investment Policy Statement and Target Allocation with a long view, commensurate to your own circumstances and risk tolerance.  We favor funds over individual equities for greater diversification at this time; We are still growth-style oriented over value, and we continue to be cognizant of geopolitical risks.  With those things in mind, we recommend that now is the time to adhere to your broad target-weighted allocations.

 
Market Commentary & Investment Perspective April 2019

Macro Overview

A change in the Federal Reserve’s stance on the direction of interest rates helped buoy equity and bond prices higher in March, allowing U.S. equity indices to post the strongest first quarter in nearly ten years.

The Federal Reserve scaled back its growth expectations for the U.S. economy and announced that it would hold rates steady with no additional rate increases this year. Economists interpreted the comments as a somber assessment of economic expansion, yet positively received by the equity and fixed income markets. The Fed mentioned trade disputes, slowing growth in China and Europe, and possible spillovers from Britain’s exit from the European Union were factors.

Short-term bond yields rose above longer term bond yields in March creating what is known in the fixed income sector as an inverted yield curve. Normally, short-term yields are lower than longer term yields, resulting in a normal yield curve. A persistent inverted yield curve would become more concerning should it linger for several quarters.

Concerns surrounding economic momentum in Europe became more prevalent as Europe’s central bank, the ECB, signaled that it would maintain interest rates below zero longer than anticipated. Slower growth in both exports and imports have been implying a slowdown throughout the EU, which is comprised of 28 European countries. The pending outcome on how and when Britain finally exits the EU is also adding duress to Britain’s trading and business partners all over Europe.

Chinese government data revealed that exports heading to other countries worldwide fell over 20% in the past year. Data also showed that imports had fallen into China, realizing that Chinese consumers were scaling back demand from prior months.

Congressional leaders are considering legislation that would repeal the current age cap of 70.5 for contributing to IRAs as well as increase the required minimum distribution age for retirement accounts from 70.5 to 72. Such legislation, if passed, would be the most significant change to retirement plans since 2006. (Sources: Federal Reserve, Dept. of Labor, IRS, Treasury Dept., ECB)

Lower Rate Outlook & Trade Talks Elevate Stocks In First Quarter – Equity Overview

Optimism over progress on U.S. trade discussions with China seemed to overshadow concerns about a slowing economic expansion helping to propel equity indices towards the end of the first quarter.

Gains were broad for the S&P 500 Index with all 11 sectors ending higher for the first quarter, which has not occurred since 2014. Technology and energy stocks were among the best performing sectors for the quarter, encompassing a broad scope of industries and companies. A counter-intuitive environment has driven stocks higher while the bond market is signaling slower growth. Some analysts are expecting a slowdown in corporate earnings growth as global demand projections have been trimmed. (Sources: S&P, Bloomberg, Reuters)

 

 
Market Commentary & Investment Perspective April 2019

Inverted Yield Curve Puts Rates On Hold – Fixed Income Overview

The yield on the 10-year treasury fell to 2.41% at the end of March, down from its peak yield of 3.25% in October 2018. The Fed’s shift from a tightening mode to a hold mode is interpreted by some economists and analysts as a lack of confidence in economic growth.

Treasury yields inverted further as the 6-month treasury note yielded more than the 7-year treasury bond in March. Inverted yields mean that shorter term rates are higher than longer term rates, translated by markets as minimal economic expansion and inflation expectations.

A sustained inversion becomes more concerning should it linger for several quarters. Some are even expecting a rate cut later in the year, if not in 2020, should economic data shed dismal projections.

Negative yields on some European government bonds reflect minimal growth expectations with subdued inflation throughout the EU. An inverted yield curve in the U.S. may partially be the result of slowing economic expectations in Europe and internationally.

The yield curve has been fairly flat over the past few months, meaning that the yield on shorter term bonds have been similar to the yield on longer term bonds. This dynamic created some uncertainty for the Fed, making it difficult to determine whether to raise rates or keep them the same.

Many believe that a divergence between stock prices and bond yields has evolved, where bond prices have risen concurrently with stock prices. Stocks historically head lower when bonds prices head higher in anticipation of slowing economic activity or lingering uncertainty. (Sources: Eurostat, Treasury Dept., Federal Reserve)

Worldwide Debt On The Rise – International Finance

Corporate debt worldwide has become a growing concern among central bankers and international finance managers. The extended period of ultra low interest rates following the monetary stimulus programs of central banks worldwide allowed companies from all over the globe to issue debt very inexpensively. Now with monetary policy on reversal from a decade of stimulus, the cost of debt will begin to increase.

Of the more than $164 trillion of debt worldwide, nearly three quarters of it is held by advanced economies such as the U.S., Britain, and Germany. A smaller proportion is maintained by emerging market economies, yet are seeing rapid growth in debt accumulation. The Bank for International Settlements identified three economies with the highest risk of a bank crisis, China, Canada, and Hong Kong, primarily due to excessive outstanding debt. Additionally, expansion of debt in the U.S. has slowed while it continues to expand in China.  (Sources: https://www.bis.org/statistics/secstats.htm;summary of debt securities outstanding)

 

 

 

 
Market Commentary & Investment Perspective April 2019

EU Data Reveals European Slow Down – European Region Update 

Industrial production among the 28 countries comprising the European Union (EU) has been steadily falling over the past year. Factors affecting the slowdown include the persistent Brexit dilemma, slowing demand from China, and weakening consumer demand throughout the EU.

Of the 28 member countries, Ireland, Portugal and Germany were among the countries with the largest decreases in industrial production. Smaller economies throughout the EU actually saw a  slight increase in production, including Estonia, Greece and Malta.

The United Kingdom continued to experience a drop in production, as the country’s pending exit from the EU produced tremendous uncertainty among all sectors of the British economy.  (Sources: Eurostat; Industrial Production Release) 

What Britain Leaving The EU Means – Brexit Overview

Turbulent and politically charged challenges between the British government and Parliament have resulted in numerous failures to finally execute Britain’s departure from the EU, known as  Brexit.

The significance of Britain exiting the EU may eventually be substantial as other countries may decide to cast similar votes whether or not to leave the EU. Several of the existing members are anxiously awaiting the outcome of Brexit to determine how challenging both politically and economically it may be. As of the end of 2018, Britain represented roughly 13% of the EU’s total GDP, ranking second in terms of GDP after Germany.

The EU (European Union) was established following the end of WW II in order to offer financial and structural stability for European countries. Since its establishment, the EU has grown to a membership of 28 countries abiding by various rules and policies set forth by the EU Council. One of the responsibilities of member EU countries is to accept and honor immigrants and citizens from other EU countries as part of the human rights initiatives recognized by the EU. Immigration has been a topic of contention among various EU countries for some time. This was a decisive factor for Britain leaving the EU since its economy and cities have been inundated by foreign-born immigrants seeking jobs and a better quality of life.

Since Britain has been part of the EU since 1973, it is expected that the unraveling of British ties from the EU could take years. Contracts, employees, and laws will all have to be revised, reshuffled, and rewritten in order to accommodate the divorce between the two.

Now that the British have decided on leaving the EU, many believe that another referendum could possibly be presented in France and other EU countries. The concern of a domino affect is very realistic, as several other EU members are experiencing similar frustrations as Britain. (Sources: EuroStat, EU Council)