May 2018
Market Update
(all values as of 08.31.2020)

Stock Indices:

Dow Jones 28,430
S&P 500 3,500
Nasdaq 11,775

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.72%
10 Yr Municipal 0.81%
High Yield 5.38%

YTD Market Returns:

Dow Jones -0.38%
S&P 500 8.34%
Nasdaq 31.24%
MSCI-EAFE -6.23%
MSCI-Europe -7.39%
MSCI-Pacific -4.42%
MSCI-Emg Mkt -1.18%
US Agg Bond 6.85%
US Corp Bond 6.94%
US Gov’t Bond 8.09%

Commodity Prices:

Gold 1,973
Silver 28.43
Oil (WTI) 42.82


Dollar / Euro 1.19
Dollar / Pound 1.33
Yen / Dollar 105.37
Dollar / Canadian 0.76

Manager’s Comments – May 18, 2018

The Q1-2018 Earnings Season has nearly concluded. Thus far, the quality of corporate sales and earnings has been tremendous. And the news could not have come at a better time. Various risks have emerged over the past few months that have caused extreme volatility and an overall market decline. This current earnings season has restored some level of market calm at least for now.

According to Thomson Reuters over 80% of the S&P 500 constituents have reported Q1-2018 results and the growth in earnings from the same period in 2017 has exceeded 25%. As well, nearly 80% of reported earnings have exceeded industry expectations. Additionally, sales have increased over 8% with over 75% of reports beating expectations. These are the strongest results achieved in many years. Looking forward, industry expectations support continued strength for the rest of 2018. This implies a very good economy.  However, despite a healthy economy, several risks now seem to threaten future market growth:

Inflation – overall producer input (raw materials) costs are fairly stable as are wages. Crude oil and gasoline prices have increased but their representation in the inflation indices is relatively insignificant. Inflation is not yet a severe threat but if wage pressures build then such a trend will be difficult to suppress. Once inflation takes hold, accelerating interest rate increases will become the norm.

Interest Rates – A rapid rise in rates remains my primary concern, yet I’ve also presumed that a rapid rise would represent a reaction to higher inflation evidence. So far, the latter hasn’t materialized. Therefore, the slow rise in rates is most likely due to the Fed’s (and other Central Banks) well-telegraphed and well-orchestrated pursuit of gradual monetary tightening. If market participants didn’t expect economic conditions to remain solid, then recent rate rises wouldn’t be happening. Therefore, if inflation remains at bay, gradual rises in interest rates shouldn’t severely undermine earnings or market growth.

Trade Tensions – President Trump’s tariff announcements were somewhat abrupt and unexpected despite his critical campaign rhetoric regarding China and Mexico. Tariffs are always industry-specific and while some sectors may be hurt temporarily, the overall market should not suffer much. Frankly, I expect positive outcomes regarding both the Chinese and NAFTA negotiations. Talk of trade wars and nationalism generally, has stalled growth in some foreign markets but this is not a worry. The strength of US manufacturing export growth and global trade volumes generally demonstrate that economies worldwide are in good shape.

Geo-Political – The North Korean and Iran sagas while fascinating should have a negligible impact on global markets regardless of whether or not real progress is made. Obviously, markets everywhere would breathe a sigh of relief if a more conciliatory tone surrounded either situation. But it is doubtful any reconciliation will spur immediate market advances.

One risk that is mentioned but with little vigor is the Mueller Investigation. This should conclude soon – probably just in time to materially impact the mid-term elections ironically. If President Trump is implicated, then market volatility will increase and a sell-off would be expected. If not, then a modest relief rally will probably occur, if only temporarily.

May 2018

Manager’s Comments Continued

I give each of these primary risks credence, but none have enough momentum currently to slow the economy and its ability to sustain very decent corporate profitability. I’m inclined to agree with analysts’ future earnings projections for 2018. So, what does this mean for market direction and return expectations? Unfortunately, my position hasn’t changed much since issuing my last newsletter in February.

Despite strong economic activity and corporate results, market valuations remain quite high even after taking into consideration the 5% decline in the S&P 500 from its high in late January. For example, according to the trailing Price-to-Earnings Ratio (P/E) at 12/31/2017 was 25.4 versus its historic mean of 15.7. Currently, this ratio stands at 24.8 which implies the market’s level of valuation hasn’t become any more attractive.

And according to Factset, the forward P/E (accounting for the next 12 months earnings estimates) is 16.5, still above the historic mean of 15.7. While the forward P/E ratio is much more reasonable, it means that the great earnings expectations for the next year must be realized simply to justify current valuations. Therefore, it is difficult to get excited about big stock gains any time soon. However, it is reasonable to expect that the market should not decline significantly when assessing fundamentals. I expect rising rates and Trump’s fate to be the biggest catalysts for heightened volatility and perhaps a modest annual gain.

Since the February newsletter, various stock additions have worked out well in client accounts. Standout performers include 2 large European Energy Companies – Total up 17% and Statoil (renamed Equinor) up 20%; Valero a US refiner up 22%; Brinker International a US-based restaurant chain up 31%. Additionally, two Tech Funds are being incrementally added to qualifying accounts – The First Trust Technology Fund (FXL) and the Power Shares Small Cap Tech Fund (PSCT). Both should benefit fully from the future of cloud computing, Blockchain, artificial intelligence, robotics and other developing tech trends.  And both funds avoid the large, well-known giants like Apple and Google and instead focus on smaller, emerging companies. Finally, there are pockets within the Consumer and Healthcare Sectors that offer opportunities I’m currently considering for purchase.

Client IRA portfolios show limited progress over the past quarter due to an emphasis on higher-yielding assets that are held to satisfy client distribution obligations. These have included some Real Estate and Energy Funds and some Preferred Stock Funds. The Real Estate and Energy funds have been pushed down although their income streams remain very robust. The Preferred Funds have held their own. Overall, these assets are serving their function of providing high income, so despite their poor price performance I’ve maintained their exposure. I expect their share prices to stabilize going forward.

I am fortunate to have tremendous clients and I always want to express my gratitude to them for their business. They provide excellent feedback and have helped me develop this newsletter and my services generally. To those readers that are not clients I also welcome your questions and input regarding this newsletter. Thank you to all my readers and please enjoy the other articles!

Paul Scheu, Manager

Consumer Profile

Personal Savings Rate Indicates Consumer Sentiment – Consumer Behavior

Federal Reserve data show that the average consumer checking account balance, a measure of consumer personal savings, has increased in 23 of the past 30 quarters. Recent data from December 2017 through March 2018, illustrates an increase in the savings rate to 3.1% of disposable personal income as of March 2018. Economists view this increase as a possible pause in economic growth until consumers feel more confident about spending. Historically, Americans tend to save more as economic times become more difficult, and tend to spend during prosperous periods. Past slow downs such as in the mid 1970s and the early 1980s saw an increase in the savings rate, a barometer of consumer sentiment. The expansion during the mid-to-late 1990s saw a gradual drop in savings, as consumers spent more confidently as their incomes rose. 



What Makes Up Gasoline Prices – Commodity Review

The dramatic decrease in crude oil prices has led to a shift as to how gasoline is priced. Various components determine the price of gasoline, including the cost of distribution, taxes, refining, and crude oil.  These various components tend to vary in the make up of gasoline prices as conditions change and markets adjust.

Sporadic and infrequent occurrences such as a major storm can reduce gasoline supplies in parts of the country leading to short term price “spikes.” Refining and distribution facilities can also be affected or even close temporarily, creating severe shortages and delivery disruptions. Labor strikes and shortages can also cause production reductions and supply issues.

Regulations affect gasoline prices in some states more than others. California typically experiences some production shortages as refiners switch from summer to fall gasoline blends to adhere to state pollution reduction measures. Gasoline prices in California are typically higher than in most of the country due to stricter environmental regulations. Gasoline prices vary from state to state depending on individual state regulations and environmental standards. The cost of refining is higher in such states as California due to required blends in order to qualify for environmental standards.

The average cost for refining nationwide makes up about 1% of a gallon of gas, excise taxes make up 17%, distribution & marketing 25%, and the raw material cost of crude oil, make up roughly 56%.

Source: U.S. Energy Information Administration

Corporate Profile

Benefits of Stock Dividends During Market Volatility 

As interest rates have dropped over the past eight years, investors seeking income sought out the benefits of stock dividends. Companies with healthy cash flows and steady earnings tend to pay consistent dividends to shareholders. Such dividends offer a stream of income usually paid out on a quarterly basis while also offering the opportunity for long-term capital appreciation from the price of the underlying stock.

During periods of increased market volatility, dividends act as a buffer against the uncertainty of companies’ earnings and a changing economic environment. Dividend paying stocks tend to be largely held by institutions and pension plans seeking consistent income in addition to conservative long-term growth.  Management becomes more accountable with dividends since a reliable stream of cash flow and earnings is essential in order to maintain consistent dividend payouts. Companies may also tend to increase their dividend payouts as their earnings and cash flow increases, acting as a hedge against inflationary pressures.

Historically, stocks termed as value companies that have reached their growth cycle tend to be dividend payers, versus growth companies that would rather reinvest their cash back into their companies for further growth. Over the past few years, the amount of cash accumulated by companies after paying all debt and operating expenses has increased, allowing some growth companies, such as those in the technology sector, to pay dividends to stock holders.

Many investors have found that a balance between dividend paying stocks and interest paying bonds tends to generate consistent and reliable income streams, and with conservative growth.

Source: S&P, Bloomberg, Dow Jones


Trucks Delivering More

A critical component of the economy proving fluid movement between companies and consumers are logistics and shipping services provided by the trucking industry. Trucks provide some of the most ample delivery logistics in the country, delivering packages and goods from Alaska to Florida spanning over 164,000 miles of highways nationwide.  There are over 1 million trucking companies spanning the country, from California and Hawaii to Alaska and Florida, transporting everything imaginable from food and milk to gasoline, cars and mail.

As a vital component of the labor market, the trucking industry employs roughly 7.3 million people, with 3.5 million of them as truck drivers. Economic growth also creates more shipping activity throughout the country, as companies ship products to other businesses and consumers.  The Federal Reserve carefully tracks the amount of cargo shipped by trucks, viewed as a gauge of economic activity throughout the nation. Data is compiled as the Truck Tonnage Index, representing all shipments via trucks in the country. The index has been steadily increasing over the past 18 months, reaching a high of 149.3 in January 2018.

Sources:, Dept. of Transportation, Federal Reserve