Market Commentary & Investment Perspectives
Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

Macro Overview

A change in sentiment was prevalent throughout the markets as new rules and regulatory reversals began to take effect. Volatility rose as markets tried to discern President Trump’s policies.

Equity markets propelled to new highs in January as optimism fueled U.S. equities, sending the Dow Jones Industrial Average to a new milestone level of 20,000. The S&P 500 Index and the Nasdaq Composite Index also reached new highs during the month.

Executive orders undertaken by the President were able to derail several rules signed into law by the Obama administration, yet fiscal policy initiatives proposed by President Trump such as tax cuts and tax reform need Congressional approval. The Congressional Review Act (CRA) will allow the Republican led Congress to reverse a number of regulations enacted by the prior administration.

Among President Trump’s first actions as president was to withdraw the U.S. from the Trans-Pacific Partnership, strengthen border parameters with Mexico and temporarily disallow certain immigrants from entering the U.S. Two highly contested oil pipeline projects were granted the ability to advance, the Keystone Pipeline and the Dakota Access pipeline.

Pharmaceutical companies became a Presidential target, as President Trump approached drug makers to lower their prices and manufacture their products in the U.S. The President’s agenda of repealing portions of the Affordable Care Act may also affect premium and medical costs.

Fiscal concepts presented by the President may encourage companies with ample cash to invest in capital rather than buying back their own stock or issuing heftier dividend payouts. A lagging key component of GDP has been capital spending.

The National Federation of Independent Business released their survey of small business optimism, which soared 7.5% to its fifth highest level in over 40 years of survey results.

We believe re-inflation and cyclicality could lead the market in 2017.  While the global economy may still be in secular stagnation, cyclical acceleration is clearly underway.  Domestically, significant fiscal stimulus is being discussed when the economy is already healthy.  Individuals and corporations expect less regulation, increased infrastructure spending, and lower taxes.

In June, none of the global Leading Economic Indicators (LEIs) was higher than the previous quarter.  By October, most were higher, confirming our prevailing positive outlook.  The market keeps reaching new highs, yet investors  remain largely defensive, indicating there is still profit to be made.  (Sources: Fed, NFIB, Dow Jones, S&P, Richard Bernstein Advisors LLC)

 

 

 

 

 
It Took The Dow Jones 120 Years To Reach 20,000

Dow Jones Reaches 20,000 – Domestic Equity Update

The Dow Jones Industrial Average hit the milestone 20,000 mark in January. The 120-year old index took 103 years to reach 10,000 in March 1999, then another 18 years to reach 20,000 in January 2017. The move from 19,000 to 20,000 took just 42 trading days, the second quickest 1,000 point gain in history for the index. The single fastest 1,000 gain occurred during the dot com boom in 1999 when the index jumped from 10,000 to 11,000 in only 24 days. Two other notable equity indices also reached new highs in January, the S&P 500 and the Nasdaq.

Equity markets pulled back at the end of January as uncertainty surrounding various administrative policies and some disappointing corporate earnings fueled a retraction of major indices. Earnings were mixed in January as earnings were reported for various companies across different sectors.

A common complaint about stock market growth has been the fact that most companies found it easier to simply issue debt at low interest rates and buy back their own stock, rather than investing in capital with the constant tide of regulatory resistance discouraging expenditures. (Sources: Dow Jones, S&P)

Increase In Bond Yields Stall – Fixed Income Update

Demand for bonds increased towards the end of January following a pull back in equities. The rise in bond demand brought bond yields lower from their elevated levels earlier in the month. An inverse relationship exists with bonds, as bond prices rise, bond yields fall.

Analysts believe that the anticipation of increased infrastructure spending and government borrowing might lead to a significant boost in Treasury borrowing, which could push up borrowing costs for the government in the form of higher interest rates.

Remarks by Fed Chairperson Janet Yellen signaled that the Fed intends to increase rates throughout 2017, contingent on economic and employment growth. Janet Yellen’s term as Fed chief ends in June 2018, allowing the President to appoint a new Fed boss then.

The steepening yield curve supports improving LEI.  (Sources: Federal Reserve, Bloomberg, Richard Bernstein Advisors LLC )

 

U.S. Dollar Finishes Higher For 2016 – Currency Market Review

The U.S. dollar had strong gains against various major currencies in 2016. Clarity surrounding the Fed’s decision to start raising rates along with anticipated growth expectations from Trump’s policies have catapulted the dollar. Both the anticipation of higher rates and a growing economy can help send currencies higher. Positive stimulus may be greater than the potential negatives from normalization of monetary policies/rising rates.  The dollar is up over 20% versus the Mexican peso, 4.5% versus the euro, 20% versus the British pound, and up 7.25% versus the Chinese yuan. (Source: Bloomberg, Federal Reserve, Richard Bernstein Advisors LLC)

 

 

 
Federal Debt As A Percentage of GDP Now Stands At 104.8%

Trump Tax Proposals – Fiscal Policy

Trump’s proposals aim to simplify taxes by reducing the number of brackets from the current seven, to three. Some argue that this simplification may actually raise taxes for single filers, rather than lower them. The current brackets, which have been in place for sometime, scale up from 10% to 40% over seven brackets, while Trump’s brackets scale up from 12% to 33% over three brackets.

Affecting almost all taxpayers is the standard deduction, which Trump proposes to raise from $12,600 currently for married couples to $30,000. For wage earners that are employees and not self-employed, the standard deduction can be the sole and largest deduction on tax returns.

The tax exemption on municipal bond interest has been broached as a possible elimination and is a fairly contested subject. The loss of the municipal interest exemption could make municipal bonds less desirable, making it more difficult for local counties and state governments to raise capital. Hence, this has become a highly politically charged decision.

In addition to Trump’s tax proposals, the Republicans under the House plan, have proposals of their own. The question is, on which proposals will the Trump and the House plan overlap and disagree.

Both plans propose doing away with AMT and the 3.8% Medicare surcharge on high income earners. The Medicare surcharge was essentially put in place to help subsidize the Affordable Care Act (ACA).

The elimination of itemized deductions are a mutual goal for both the House and Trump tax plans. The House plan would only retain two critical deductions: mortgage interest and charitable contributions. All other deductions would be eliminated, including the deduction for state and local income taxes, property tax, and sales tax. The Trump proposals would retain most of these deductions, but cap them at the $200,000 level.

Both the House and Trump plan would repeal the estate tax, which allows families to pass along assets to heirs free of estate tax. The current maximum estate tax rate is 40%.

Small business owners would benefit immensely from proposals presented by the House and Trump. The House plan would limit the tax rate for pass through entities, such as S-Corps to 25%, while the Trump plan proposes a rate of just 15%. The Tax Foundation estimates that about 95% of U.S. businesses in the United States are considered pass throughs such as S-Corps. A Trump proposal for a cut in the corporate tax rate would reduce the rate from 35% to 15%.  (Sources: donaldtrump.com, taxpolicycenter.org, taxfoundation.org)

 
China Has The Largest Trade Deficit With The U.S. At -$319 Billion

Looking Ahead

They’re calling it the Trump bump, but to paraphrase Warren Buffet in a  recent appearance, “Anyone making investment decisions based on politics, is making a mistake”.  This US bull market has been and continues to be justified by fundamentals.  Corporate profits have become the fastest growing portion of national income.  Most bull markets are comprised of the combination of central bank liquidity, improving fundamentals, and negative sentiment.  All three have been present during this bull market.

Alternatively, three signs that the probability of a bear market is increasing are 1) Central banks withdrawing liquidity- the nominal 25 basis point hike planned for March is having little impact and concerns are moderated by gradual, conditional movements of the fed funds rate); 2) Profits recession:  The US profits cycle is in recovery and stock market leadership has shifted away from defensive sectors, and towards cyclical ones; 3) Overly bullish sentiment:  Safe strategies are safe until everyone thinks they are safe.  Currently, low volume trading as new highs are reached indicates otherwise.  Given the low level of interest rates, Warren Buffett recently said he believes U.S. stock prices are “on the cheap side.” If rates spike, he’ll reevaluate.

Globally, risks in China include high debt (which is moderated to some extent through control by the centralized government), and US and geopolitical uncertainty.  In the US, inflationary expectations troughed in February of 2016, and as we pointed out  above and in our currency outlook, any inflationary pressures have been somewhat moderated with very gradual movements by the fed and their apparent willingness to adjust their plan when necessary.  A reevaluation of inflation has also occurred in The UK, Germany and Japan.  Leading Economic Indicators are strengthening in a unified manner.

To summarize, following the theme of re-inflation, and based upon the macro fundamentals of 2016, we believe we should generally tilt toward equities, value, cyclical sectors, and emerging markets.  (Sources: Dow Jones, S&P, Richard Bernstein Advisors LLC, Seeking Alpha)