A lot can happen in two weeks

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

A lot can happen in two weeks – and you don’t have to be a fan of the great romantic comedy Two Weeks Notice to know that – just take a look at the economy and markets. (I do believe Sandra Bullock and Hugh Grant are both incredible comedic actors!)

Think about it, in the past two weeks we have contended with:

  • The S&P 500 Index (S&P 500) making a new, all-time high (Chart A)
  • Q1 GDP growth coming in at a much better than expected 3.2%
  • The VIX – Wall Street’s “Fear Index” – spiking 50% (Chart B)
  • The US unemployment rate falling to a 50-year low of 3.6%
  • The S&P 500 dropping 130 points, or 4.4%, peak to trough

Chart A

SP 500 all time high

Chart B

Fear Index VIX

The torrent of good news, bad news, and market volatility begs the question, what is going on? In a word – or in a few – concerns over US/China trade relations bumped up against strong economic growth and bullish investor sentiment. Said more plainly, the US economy has been surprising to the upside and that strong performance has been reflected in a robust rally for US equities and very bullish investor sentiment. So, when President Trump took a surprisingly hawkish tone toward China many investors quickly looked past strong near-term economic performance and began to price in a potential, trade war driven, economic slowdown – and did so in pretty jarring fashion.

Bumpy markets are never fun, and we do expect volatility to persist. We also see the US and China resolving their differences over trade. For now, we remain optimistic on the US economy and US equities.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

The bond market is behaving – and that’s good news for stocks and the economy

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Ask most folks the question, “How is the market doing?” and they will likely quote the day’s closing price for the S&P 500 Index or provide the year-to-date return for the Dow Jones Industrial Average. That’s understandable, given we often gauge near-term prosperity and economic performance by the tone and tenor of the stock market. But as important as the US stock market is – and it’s mighty important – we’d argue the US bond market is more germane to the outlook for the economy, and, somewhat ironically, it is also pretty important to the outlook for the stock market. And it’s also a heck of a lot bigger (as of early 2018 there was approximately $41 trillion in US debt outstanding vs. a total market capitalization for the Russell 3000 – which represents nearly 99% of all publicly traded companies – of $30 trillion. Those numbers have moved a bit since but not by much).

We consider the bond market more germane to the economy due to its size, the frequency with which borrowers come to it for capital, and how quickly lenders will price in a weakening of economic fundamentals. And the bond market has a meaningful impact on the stock market for all of the same reasons, as well as the fact that interest rates figure prominently when it comes to valuing individual stocks and the broader stock market (all things being equal, lower interest rates mean higher P/E ratios and higher prices).

And lately, the bond market has been behaving in a fashion that is constructive for both the economy and equities. More specifically, borrowing costs for high-yield companies aren’t increasing the way they did heading into prior recessions or growth scares (see chart A below;  a “junk bond spread” closer to 300 basis points speaks to an accommodative environment for corporate borrowing and credit); interest rates remain subdued, which is bullish for stock prices and the yield curve (a classic economic indicator) has been steepening, with the spread between the US 2-year note and US 10-year note hitting about 22 basis points after tightening down to 8 basis points during late 2018 (see chart B below). Historically, an inverted yield curve has often preceded an economic downturn, so a steepening of the curve is welcome news.

Chart AJunk bond spread 3

Chart BUS 2 year 10 year

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

A good rule of thumb for valuing the market

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Coming into 2019, Brinker Capital believed if we could solve for monetary policy risk and trade policy risk that the economy and markets would be biased higher. Well, so far, we’ve received more good news than bad on both fronts, and risk assets and the economy have responded, with the S&P 500 Index (S&P 500) up about 17% year-to-date (see chart below) and the US economy growing a much better than expected 3.2% in Q1 – though that number is likely to be revised over time. Having written that, the robust market rally to begin the year has many investors wondering whether stocks can move higher from here.

SP 500 YTD 2019

One way to think about market valuation and potential price appreciation is via “The Rule of 20.” Simply put, The Rule of 20 states a reasonable multiple for the market can be determined by deducting the rate of inflation from the number 20. The reason The Rule carries weight on Wall Street is historically the market’s P/E ratio (i.e. multiple) has more or less followed the formula (see below; the caveat being The Rule doesn’t prove relevant during periods of deflation). And once we have the P/E ratio, we multiply by expected earnings to arrive at a price target for the index, and in turn, the broader market.

Sp 500 average trailling pe

Well, inflation – as measured by the Consumer Price Index – is running at 2%, and Wall Street expects earnings for the S&P 500 on a forward four quarter basis to total approximately $172. So, an 18 P/E ratio on $172 produces a price target of 3,100 for the S&P 500 and additional gains, from today’s price, of about 6.0%.

We remain optimistic on US equities as we move forward into 2019.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

Battle of the market stars – Lou Ferrigno is earnings, ABC is stocks

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Before there was reality TV there was, well, a lot of things including Battle of the Network Stars, which in a way was reality TV. Hosted by Howard Cosell and broadcast annually during the late ‘70s and early ‘80s, the show featured celebrities from the Big 3 networks – ABC, NBC, CBS – competing in a series of athletic events, sort of an Olympics for TV stars. It was spectacular.

We mention BOTNS as we are entering earnings season and earnings more than anything pull the market along – well earnings and interest rates, and rates are low and supportive of equity prices – and investors are worried as Wall Street is expecting Q1 2019 EPS for the S&P 500 Index to be down about 2%, the first year-on-year drop since 2016, per the chart below.

growth rate

Some fear we are facing a sustained drop in earnings and stock prices. We don’t think so, which brings us back to BOTNS and one of its most famous participants, the great Lou Ferrigno. An iconic moment in BOTNS is the 1979 Tug of War when Ferrigno, aka The Incredible Hulk from the CBS show of the same name, singlehandedly nearly pulls the ABC team into the pool separating the squads, helping win the event for his CBS team. Well, we see Lou Ferrigno as 2019 earnings and stocks as the ABC BOTNS team. Earnings might be flat to down slightly in Q1, but they should be up mid to high single digits for the year and will likely exceed estimates as the rebound in oil helps push energy company profits higher.

Growing earnings, muted interest rates, and contained inflation are all points of support for US stocks as we move through 2019 and should, in fits and starts, pull the market higher.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart Source: FactSet

 

The recession has been dodged (or ducked, or dipped, or dived, or dodged)

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Recently, more than a few market prognosticators saw the US economy headed for a recession, a not unreasonable thought given weakened corporate and consumer sentiment, a very disappointing 20,000 jobs created in February, and increasingly flat US 2 Year / 10 Year Yield Curve and inverted US 3 Month / 10 Year Yield Curve, a harbinger of an economic downturn.

While cognizant of weakening economic data as we moved into 2019, Brinker Capital believed if we solved for monetary policy risk and trade policy risk both the economy and risk assets would be biased higher. Well, the Federal Reserve put its rate hiking and balance sheet unwinding plans on hold and the US/China trade discourse improved, with signs pointing toward an imminent agreement. And, as those meaningful economic and market headwinds abated, economic data improved and risk assets rallied. More specifically, the US added a better than expected 196,000 jobs in March, the US 2 Year – 10 Year Yield Curve steepened, the US 3 Month – 10 Year Yield Curve turned positive, albeit by only about 10 basis points, per the chart below, and the S&P 500 rallied 2%+ to start the second quarter, tacking on additional gains to a very strong Q1 2019. Outside the US, efforts by the Chinese government to stimulate its economy are bearing fruit, while the European Central Bank has assumed a more accommodative monetary policy stance.

Us Treasury

Today, we see little near-term risk of a US recession and our base case for the US economy remains growth of 2% to 2.5% in 2019.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

 

Vlog: Quarter-end Q&A 1Q2019

Brinker Capital Global Investment Strategist, Tim Holland, CFA, asks and answers those questions we think will be top of mind for clients as they open their quarterly statements and think back on the quarter that was:

  1. Have we seen the high in the stock market for the year?
  2. Is the yield curve indicating a recession is imminent?
  3. What is the market and economic impact of the Mueller Report?

Q&A_1Q19-thumbnail_Blog_v2

 

 

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a registered investment advisor.

Vlog – To Tell The Truth

Given the news flow and data points of late, Brinker Capital Global Investment Strategist, Tim Holland, CFA, poses the question to our $20 trillion economy, “Will the real US economy please stand up?” (recorded March 28, 2019).

  Thumbnail_4-1-19

 

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a registered investment advisor.

It seems the jobs market has been drinking a bit of JOLT

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

With an attention-grabbing tagline, “All the sugar and twice the caffeine,” JOLT Cola burst onto the consumer product scene in the mid-1980s. Fortunately, or unfortunately depending on how one feels about highly caffeinated, sugary, carbonated beverages, JOLT Cola is no more. But, for we capital market types, there remains, another more important JOLT, and recently that JOLT has been packing more of a punch than JOLT Cola ever did.

Every month, the Bureau of Labor Statistics compiles the Jobs Openings and Labor Turnover Survey (i.e. JOLTS). The JOLTS program queries 16,000 private nonfarm businesses and government entities in the 50 states and the District of Columbia on timely employment topics, including job openings, hires, and layoffs. The data is compiled and analyzed to help us better understand the state of the labor market. And the survey result that commands the most media and investor attention is the jobs opening data that helps determine the spread between the number of Americans out of work and actively seeking a job and the number of available jobs. January of this year marked the 11th consecutive month where job openings outnumbered job seekers. More specifically, openings exceeded the number of Americans looking for work by more than 1 million. Today’s job market stands in sharp contrast to what the country experienced in 2009 when nearly 16 million Americans were seeking a job and companies and government entities had only two million positions to fill, see the chart below. Said plainly, there are more help wanted signs hanging in windows across this country than there are Americans looking for work. We are all likely living through the strongest jobs market in our respective lifetime.

US employment and job openings

All of this is very good news for the American worker. But, as we highlighted last week, a real risk for the markets and the economy is that a too tight jobs market sparks wage inflation and pulls the Federal Reserve, so recently moved to the sidelines, back into the game of raising rates.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

Welcome back, welcome back, welcome back!

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

A hallmark of the Great Recession was a decline in the prime age labor force participation rate from 83% to 80%, see the chart below. While a three-point drop might not seem significant, it reflects millions of Americans walking away from the economy, giving up on ever finding gainful employment. The economic and societal consequences of that dynamic were staggering.

fredgraph (1)

Fortunately, over the past few years our long-lived economic expansion managed to produce both a level of demand for labor and gains in wages – north of 3% – significant enough to pull millions of Americans back into the workforce. Said differently, millions of Americans have been welcomed back to the economy, which is reflected in a rebound in the labor force participation rate to north of 82%. And while that is great and welcomed news for those Americans and their families, a tightening labor market and rising wages also pose risks to the markets and economy. To better appreciate this seemingly counterintuitive point, we have to remember that significant slack in the labor market post the Great Recession helped keep a lid on both interest rates and inflation, which was bullish for risk assets and supportive of economic growth. The risk now is that as the job market continues to tighten and wages continue to rise, the Federal Reserve will be forced to raise interest rates further, and in doing so will make the cost of capital too expensive, choking off corporate and consumer spending, ultimately putting the economy into a recession and stocks into a bear market.

While we do think inflationary and interest rate risk is underappreciated by many market participants, we also continue to see enough capacity in the labor market that wage inflation and broader inflation shouldn’t become a real risk to the economy and markets until sometime in 2020, at the earliest.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: US Bureau of Labor Statistics

It’s a big birthday for the bull market, and we see a successful quest for greater gains

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Happy birthday bull market! The longest running bull market in United States history hit a major milestone last week, turning 10 on March 9. It sure has been an interesting and exciting 10 years.

US equities, as measured by the S&P 500 Index, found their footing on March 9, 2009 while the US and the world were in the throes of the Great Recession. Since then, the S&P 500 has produced a total return of approximately 396% and an average annualized return of approximately 17.3%. But, the ride higher hasn’t always been smooth. Consider, since March 2009 we’ve contended with four corrections of 13%+, US government shutdowns, a US debt downgrade, the European debt crisis, Brexit, the Arab Spring, the risk of an armed conflict on the Korean Peninsula, and a budding trade war with China. Yet even with all of that, the S&P 500 sits at 2743 – up from its open price of 675 on March 9, 2009 – and the US economy is growing 2.5%. Proof positive the economy tends to expand, and risk assets tend to increase in value. And, to that point, we think the market will remain on a successful quest for greater gains. After all, US equities are reasonably valued, earnings are growing, inflation is contained, monetary policy isn’t restrictive, and investment sentiment isn’t ebullient. We remain optimistic on US stocks into 2019, though we do expect a volatile trading environment.

WW March 11 2019 The Bull's Birthday (002)

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart Source: FactSet