Meridian Financial Group https://mfg-nw.net Fri, 22 Mar 2019 09:15:08 +0000 en-US hourly 1 https://wordpress.org/?v=5.1.1 https://mfg-nw.net/wp-content/uploads/sites/37/2019/03/cropped-logoformeridian11-32x32.jpg Meridian Financial Group https://mfg-nw.net 32 32 Portfolio Compass | March 20, 2019 https://mfg-nw.net/portfolio-compass-march-20-2019/ https://mfg-nw.net/portfolio-compass-march-20-2019/#respond Fri, 22 Mar 2019 04:16:10 +0000 https://mfg-nw.bradcable1.com/portfolio-compass-march-20-2019/ Expectations for solid but slower growth in the U.S. economy and corporate profits support our year-end 2019 fair value target for the S&P 500 of 3000.

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INVESTMENT TAKEAWAYS

  • Expectations for solid but slower growth in the U.S. economy and corporate profits support our year-end 2019 fair value target for the S&P 500 of 3000.*
  • 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 and the U.S.-China trade dispute is potentially resolved.
  • We favor emerging markets (EM) equities over developed international for their solid economic growth trajectory, favorable demographics, attractive valuations, and prospects for a U.S.-China trade agreement.
  • Slower but still solid economic growth and modest inflationary pressure may be headwinds for fixed income. The pause by the Federal Reserve (Fed) reduces nearterm upward pressure on interest rates, but an additional hike is still possible in the second half of 2019.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment-grade corporates (IGC) and mortgage-backed securities (MBS) over Treasuries. Yield per unit of duration remains attractive for MBS while economic growth is supportive of IGCs.
  • The S&P 500 Index is up 13% to start 2019, with broad participation at sector and stock levels. We favor large caps vs. small, and from a technical view the outperformance of small caps in the initial stages of the rally appears to have run its course.

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 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

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 #1-834262 (Exp. 03/20)

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Market Insight Monthly | February 2019 https://mfg-nw.net/market-insight-monthly-february-2019/ https://mfg-nw.net/market-insight-monthly-february-2019/#respond Wed, 20 Mar 2019 04:09:26 +0000 https://mfg-nw.bradcable1.com/market-insight-monthly-february-2019/ U.S. economic data were sound in February, even as confidence fell amid uncertainty from global trade and political headwinds.

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ECONOMY

SOUND ECONOMIC DATA IN FEBRUARY AMID GLOBAL UNCERTAINTY

U.S. economic data were sound in February, even as confidence fell amid uncertainty from global trade and political headwinds. The Conference Board’s Leading Economic Index (LEI), an aggregate of ten leading indicators, declined 0.1% in January, but grew 3.5% year over year. While the LEI declined month over month, positive year-over-year momentum signaled low odds of recession in the coming year [Figure 1].

The delayed fourth quarter gross domestic product (GDP) report was an encouraging sign to investors that global uncertainty hadn’t significantly derailed output. Fourth quarter GDP grew 2.6% from the prior quarter, higher than consensus estimates for a 2.2% gain. GDP grew 2.9% overall in 2018 and 3.1% year over year for the fourth quarter. Consumer spending contributed 1.9%, the biggest component of fourth quarter output growth, while business spending
added 0.8%.

Labor market strength was another bright spot. Nonfarm payrolls rose in January, capping jobs’ biggest two-month increase since July 2016. The participation rate also climbed to its highest point since 2013, indicating more participants were enticed by solid economic conditions to enter the workforce. The unemployment rate did tick up to 4% in January, but the increase came with caveats due to the government shutdown and higher participation.

Inflation data remained at manageable levels. Average hourly earnings rose 3.2% year over year, around the fastest pace of the cycle, but materially lower than the 4% growth that has preceded recessions historically. Pricing gauges also showed that inflationary pressures remain manageable. The core Consumer Price Index, which excludes food and energy, increased 2.2% year over year, while the core Producer Price Index climbed 2.8% year over year. Core personal consumption expenditures, the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.9% year over year, its eighth-straight month within 0.1% of policymakers’ 2% target.

Manufacturing rebounded from a discouraging slide through the end of 2018. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, rose to 56.6 in January. Markit’s PMI also ticked up to 54.9 in January, confirming the improvement in manufacturing activity. While recent manufacturing data are encouraging, we see the ongoing U.S.-China trade dispute as the primary obstacle to consumer and corporate health. Once trade risk subsides, we expect manufacturing activity to improve further as companies resume business investment.

Confidence continued to deteriorate though, fueling speculation of an economic slowdown. The Conference Board’s Consumer Confidence Index slid for a third straight month in January, its biggest three-month decline since 2011, while NFIB’s measure of business confidence fell for a fifth-straight month. Drops in consumer confidence have been late-cycle signals historically, as lower confidence could weigh on consumer spending, and consequently, on output [Figure 2]. Separately, a report delayed by the government shutdown showed retail sales fell the most in December on a monthly basis since 2009, boosting speculation that lower confidence could be cooling consumer activity.

Central Banks Take a Break

Major central banks around the world took a break, as the Fed, European Central Bank, and Bank of Japan did not have meetings scheduled in February. However, financial markets’ expectations for policy were consistent during the month. Fed fund futures implied an 85% probability that rates will remain unchanged through the rest of 2019, and an 11% chance that rates will be cut before the end of the year.

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 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

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 #1-830515 (Exp. 03/20)

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An Attention-Grabbing Jobs Report | Weekly Economic Commentary | March 18, 2019 https://mfg-nw.net/an-attention-grabbing-jobs-report-weekly-economic-commentary-march-18-2019/ https://mfg-nw.net/an-attention-grabbing-jobs-report-weekly-economic-commentary-march-18-2019/#respond Tue, 19 Mar 2019 04:56:56 +0000 https://mfg-nw.bradcable1.com/an-attention-grabbing-jobs-report-weekly-economic-commentary-march-18-2019/ A disappointing February jobs report, released March 8, has increased concerns about a slowing U.S. economy among some market participants.

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KEY TAKEAWAYS
  • February’s job growth was disappointing, but it followed the biggest two-month gain since 2016.
  • Job growth and modestly rising wages remain strengths of the current economy.
  • We don’t see signs of February’s jobs report impacting growth expectations or the Fed’s path.

Click here to download a PDF of this report.

A disappointing February jobs report, released March 8, has increased concerns about a slowing U.S. economy among some market participants. However, we believe the report did little to change the overall economic picture. In fact, job growth and modestly rising wages remain strengths of the current economy and continue to support consumer activity. The economy added 20,000 jobs in February, the slowest pace of growth since September 2017. While that level of gains would be a concern if it were to continue, it comes against a backdrop of robust jobs gains the prior two months, and looking back a year, annual job growth remains well above the cycle average. The economy is slowing from a strong 2018, but we still expect above-trend growth in 2019. We will be monitoring how things develop, but overall we still believe strong labor markets with manageable wage growth will remain supportive of the overall economic picture, even taking the February slowdown into account.

THE BIGGER PICTURE

Job growth appeared to be going through some normal cyclical slowing toward the end of 2017, but then began to reaccelerate heading into 2018 [Figure 1]. Tax incentives and accompanying economic growth have helped pull people back into the labor force while also encouraging companies to create new jobs. While wedon’t expect job growth to return to peak levels seen in 2015, growth has been surprisingly strong for this point in the cycle. The 20,000 jobs added in February should be viewed in the context of the more than 500,000 jobs added in the prior two months, the strongest two-month stretch since 2016, and the average of more than 200,000 jobs added monthly over the last year. Wage gains also increased to a new cycle high of a still manageable 3.4% annually. Wage growth is starting to become a drag on corporate margins but does support consumer spending. To date, wage gains have put minimal upward pressure on inflation, and historically have had to be closer to 4% to bring the Federal Reserve (Fed) back into play due to concerns about an overheating economy.

ABOVE-AVERAGE GROWTH

Historically, in the twelve months before the start of a recession it’s been unusual for jobs to be growing at a pace faster than the expansion average [Figure 2]. In fact, job gains before past economic peaks have been closer to 75% of the cycle average in the year before a recession starts. Right now, jobs are growing well above the expansion average of 164,000 jobs created per month. It would take job growth of about 140,000 per month over the next six months to pull us down even to the cycle average, and job growth of around 60,000 a month to get to the 25% slowdown that’s more typical of past recessions. We expect job growth to stay comfortably ahead
of that pace.

UNCHANGED EXPECTATIONS

The Atlanta Fed and New York Fed both produce “NowCast” forecasts of current quarter gross domestic product (GDP) that updates as new data are released. The Atlanta Fed’s NowCast forecast for first quarter GDP actually increased following the release of the jobs report because of unusually strong housing data released at the same time, which more than offset the negative impact of the jobs report. The New York Fed’s NowCast viewed the jobs report’s impact as neutral, with a bump up in the outlook due to a decline in the unemployment rate, completely offsetting the negative impact of the weak jobs number. Again, housing data were a much larger positive. First quarter 2019 GDP growth is expected to be disappointing, with the Bloomberg-surveyed economists’ consensus currently sitting at 1.5%, and then bounce back later in the year, but so far, the jobs report has had no real negative impact to current quarter GDP expectations.

WHAT ABOUT THE FED?

We received several key data points on inflation last week, reinforcing the jobs report’s message that economic reports likely won’t deflect the Fed from its current stance. The Fed next meets March 19–20 with no real likelihood that it will raise rates, but markets will be paying close attention to changes in the policy statement, updated projections, and Fed Chair Jerome Powell’s press conference following the meeting’s conclusion. The weak February jobs data and generally in-line inflation readings will do little to disrupt the Fed’s current path of pausing on rate hikes until evidence appears that further hikes are merited. Modest but well-contained inflation does not seem a precursor of potential overheating, allowing the Fed to wait patiently for signs that a decelerating U.S. and global economy has potentially reversed course.

CONCLUSION

Attention-grabbing weak job creation in February shouldn’t distract investors from otherwise strong labor market trends, especially for this point in the cycle. At the same time, the February jobs report and manageable inflation data support a continued pause in rate hikes while the Fed continues to watch for signs of a rebound in the U.S. and global economies. We’ll continue to watch for signs of a weakening labor market, but for now we would still consider the job market a fundamental strength of the economy that will continue to support consumer spending while still putting only minimal pressure on inflation.

 
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

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.

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 #1-833010 (Exp. 03/20)

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Movin on Up (in Market Cap) | Weekly Market Commentary | March 18, 2019 https://mfg-nw.net/movin-on-up-in-market-cap-weekly-market-commentary-march-18-2019/ https://mfg-nw.net/movin-on-up-in-market-cap-weekly-market-commentary-march-18-2019/#respond Tue, 19 Mar 2019 04:48:50 +0000 https://mfg-nw.bradcable1.com/movin-on-up-in-market-cap-weekly-market-commentary-march-18-2019/ Large caps may be better positioned than small caps, given where we are in the business cycle.

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KEY TAKEAWAYS
  • Small cap stocks have performed well so far in 2019; however, we believe the environment is getting tougher.
  • Large caps may take the baton and sustain leadership as small cap performance potentially enters a weaker phase.
  • Small and large cap stocks may both deliver gains over the rest of the year, but we expect large caps to lead.

Click here to download a PDF of this report.

Large caps may be better positioned than small caps, given where we are in the business cycle. Small cap stocks have performed well so far in 2019, with the Russell 2000 Index, the most popular small cap benchmark, up 15.2% year to date compared with the 12.6% gain in the large cap S&P 500 Index. Small caps tend to do better when economic growth expectations improve and stocks broadly rally, which has been the case since late December 2018. However, we believe the environment is getting tougher for small caps, for reasons we discuss below.

FIVE REASONS TO FAVOR LARGE CAPS OVER SMALL

We favor large cap stocks over small primarily for these five reasons:

    1. Age of the economic cycle. Large caps tend to do better late in the economic cycle. Small cap underperformance in 1989, 1990, the late 1990s, and 2007 are the most recent examples of late cycle small cap underperformance (based on the Russell 2000 and S&P 500). We don’t see recession in 2019, but after 10 years of economic growth, we recognize the cycle is probably in its latter stages. Small caps tend to underperform large caps during economic recessions, which markets may increasingly begin to price in over the next year or two.
    2. Tightening financial conditions. As the cycle ages, tighter financial conditions may follow. Small cap companies depend more than larger companies on borrowing to fund growth, and tend to have higher costs of capital. As a result, they tend to be more sensitive to credit market stresses. We do not see any major credit disruptions in the near term, but the odds have risen following three years of Federal Reserve (Fed) interest rate hikes. We expect only gradually rising market-based interest rates over the rest of 2019—the high end of our 10-year yield forecast is 3.25%—but if our forecast is too low, small caps may experience some incremental relative weakness.
    3. Trade policy. We continue to expect a trade deal with China in the near term. The latest news suggests that a framework for a deal has been largely mapped out and that President Trump and President Xi will meet over the next two to three months to seal the deal. Large cap companies have bigger global footprints with more global supply chains, so the resolution of the trade conflict should benefit them more. Even if the deal unravels, small caps may not outperform large caps because the broad market would probably sell off.
    4. The dollar. We expect the U.S. dollar to weaken in the medium to long term due to the twin deficits (budget and trade), which could be beneficial for large cap stocks relative to their small cap counterparts. Figure 1 shows small caps tend to do worse (and large caps better) when the dollar weakens, mostly because of their more domestic focus. Some factors that may limit any short-term dollar rallies include: 1) We think the Fed is done, or nearly done, raising interest rates; 2) Most of the U.S. dollars that companies were expected to repatriate from overseas at low tax rates following tax reform are here already; and 3) The expected gap in economic growth between the United States and the rest of the world may have stopped widening, as growth overseas may have bottomed, while the U.S. economy has only recently started to slow.

    5. Fading impacts of tax reform. One of the reasons we liked small caps after the November 2016 election was that tax reform’s benefits to smaller companies were relatively greater. Because smaller companies tend to be more
    U.S.-focused, they paid higher tax rates. Once the U.S. corporate rate was brought down, those companies were able to save more on taxes. Larger, more global companies were paying lower average corporate tax rates before the December 2017 tax reform because they generated more profits in lower-tax countries.

TECHNICAL INSIGHTS

Small caps staged a furious rally to kick off 2019, with the Russell 2000 up nearly 18% year to date at the early March peak. Of course, small caps were down far more than large caps late last year, as the Russell 2000 lost 20.5% in the fourth quarter for the worst quarterly decline since the U.S. debt downgrade during the debt limit crisis in the third quarter of 2011.

What do we see now? Large caps may take the baton and sustain leadership as small cap performance potentially enters a weaker phase. As we show in Figure 2, the Russell 2000 Index recently failed to break above its 200-day moving average. After providing support for the index for multiple years, this long-term trend line is now acting as resistance.

Lastly, a relative strength chart (lower pane of Figure 2) of the Russell 2000 Index versus the S&P 500 shows this trend line met resistance at similar points late last year. In this chart, a falling line indicates small cap underperformance relative to large caps.

CONCLUSION

Small caps may have a difficult time keeping up with large caps over the balance of the year, despite their strong start. As the economic cycle ages and financial conditions potentially tighten, we would expect better performance from large cap stocks. Our belief that the U.S. dollar may have only limited near-term upside and more downside in the medium to longer term supports a more cautious view of small caps. And finally, if the U.S. and China reach a trade agreement as we expect, the benefit should be greater for global large cap companies than for small caps. Small and large cap stocks may both deliver gains over the rest of the year, but we expect bigger gains for large caps. Our year-end S&P 500 fair value target remains at 3,000, 6% above Friday’s closing level.

 
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 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.

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.

The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index.

DEFINITIONS

The 200-day moving average (MA) is a popular technical indicator that investors use to analyze price trends. It is the security or index’s average closing price over the last 200 days.

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

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 #1-833004 (Exp. 03/20)

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Modest Pullback Or Something Bigger? | Weekly Market Commentary | March 11, 2019 https://mfg-nw.net/modest-pullback-or-something-bigger-weekly-market-commentary-march-11-2019/ https://mfg-nw.net/modest-pullback-or-something-bigger-weekly-market-commentary-march-11-2019/#respond Tue, 12 Mar 2019 04:48:09 +0000 https://mfg-nw.bradcable1.com/modest-pullback-or-something-bigger-weekly-market-commentary-march-11-2019/ Fundamentals remain sound, valuations are reasonable, and most technical indicators we follow point to further potential gains ahead.

The post Modest Pullback Or Something Bigger? | Weekly Market Commentary | March 11, 2019 appeared first on Meridian Financial Group.

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KEY TAKEAWAYS
  • Following such a strong rally since the December 24 lows, a pullback is reasonable to expect.
  • We expect additional stock market weakness beyond last week’s more than 2% decline to be modest.
  • Fundamentals remain sound, valuations are reasonable, and most technical indicators we follow point to further potential gains ahead.

Click here to download a PDF of this report.

Following the strong 2019 rally, we ask if stocks are overdue for a pullback. The S&P 500 Index rallied 17% in 2019 and 9.4% since the December 24, 2018, low. The strength of the rally has been a surprise to many given widespread concerns about slower global growth, trade uncertainty, and the age of the bull market—which turned 10 last weekend, as we discussed here last week. Following that strong rally, a pullback is to be expected; but we don’t think it will get much worse than last week’s 2.1% drop, for reasons discussed below.

FUNDAMENTALS REMAIN SOUND

Although stocks may need a pause to digest recent gains, we continue to believe fundamentals support further gains for stocks this year. The economy is growing steadily and, despite Friday’s soft and likely weather-distorted payrolls report, is creating jobs at a solid pace for this point in the cycle. We don’t think it’s widely understood that fiscal stimulus (tax cuts and government spending) will add more to gross domestic product (GDP) in 2019 on a percentage basis than it did in 2018.

Though earnings growth is slowing, economic growth supported by fiscal stimulus, expansionary manufacturing surveys, and solid labor markets point to another year of record profits in 2019. Historically, corporate revenue is correlated with GDP plus inflation (or nominal GDP), which could approach 5% this year, if our forecasts are accurate. History also reveals that peaks in earnings growth—as we experienced in the third quarter of 2018—have tended to be followed by several years of economic growth and stock market appreciation, which should be reassuring to those who think a now 10-year-old bull market is getting fatigued.

Though nothing has been signed, a trade deal with China over the next month or two appears likely. Key players in the negotiations have expressed increasing optimism, and it’s clear President Trump wants a deal. Any agreement is probably good news for stocks at this point, but a potential rollback of tariffs put in place last year presents a possible upside surprise.

Finally, keep in mind that the post-midterm election period has historically produced strong gains—Since WWII, the S&P 500 has never been down over the 12-month period following midterm elections (18 for 18), having produced an average 14.5% gain during those periods. President Trump sees a strong stock market as part of his path to reelection, suggesting this historical pattern may hold.

MIXED TECHNICAL PICTURE

Most of our favorite technical indicators, such as market breadth, are flashing positive signals and there are a number of historical analogues pointing to more gains ahead:

  • The S&P 500 is above its upward sloping 50-day moving average (MA), suggesting an improving trend, and at support in the form of its 200-day moving average.
  • March has been the second strongest month for the stock market over the past 20 years.
  • Stocks tend to go up in the final 10 months of a year (25 out of the last 27 years) after experiencing gains during January and February.
  • Market breadth is favorable, with a high proportion of stocks participating in this year’s advance.
  • Investor flows have been negative in 2019—evidence of caution, not euphoria.
  • Investor sentiment surveys suggest bulls are not in overabundance.

At the same time, however, some indicators suggest the S&P 500 may be due for a pullback.

  • The percentage of stocks above their 50-day moving averages is still high at 84%, though down from the recent peak of 92%.
  • Put/call ratios suggest investors are complacent; more nervousness is typical ahead of rallies.
  • The S&P 500 has failed to sustain levels above the 2,800 level four times since mid-October, making a breakout more difficult.
  • Support for the S&P 500 below the 50-day moving average is at 2,650, 3.4% below Friday’s closing level.
  • The average peak-to-trough pullback after a positive January and February is 9%.

RISKS

While we do think the macro environment sets up well for stocks, we are mindful of several risks. Earnings growth has slowed quite a bit and could slow further. A potential first quarter earnings decline may fuel investor concerns about another earnings recession (not our expectation) and weigh on investor sentiment.

Though unlikely, a disorderly Brexit that creates instability in Europe is possible. The European Central Bank reminded us last week how much European economies have slowed; risk of spillover into the U.S. remains.

The latest trade headlines have been positive, but President Trump could still walk away. Even if a deal is reached, it may already be priced in and markets may sell the news.

Finally, although the Fed is on hold now, the central bank may feel the need to respond with tighter policies should economic growth improve later this year.

CONCLUSION

Putting all of that together, a 5% or so pullback may be in order. With fundamentals still sound, valuations quite reasonable (discussed here two weeks ago), and the potential catalyst of a U.S.- China trade deal, we would expect additional stock market declines beyond last week’s 2% dip to be fairly modest. Keep in mind that pullbacks of this
magnitude are typical—we tend to see three or four of them each year. Weakness may provide opportunities for suitable investors to add equities based on what we see as a generally favorable macroeconomic environment.

The possibility of a pullback does not scare us off of our 2019 year-end forecast for further stock gains from here. Although it’s reasonable to expect a pickup in volatility following the strong bounce off December lows, we maintain our 2019 year-end S&P 500 target of 3,000, or 9% above Friday’s closing level.

 
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 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.

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.

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 #1-830608 (Exp. 03/20)

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Main Street Sentiment At 7-Year Low | Weekly Economic Commentary | March 11, 2019 https://mfg-nw.net/main-street-sentiment-at-7-year-low-weekly-economic-commentary-march-11-2019/ https://mfg-nw.net/main-street-sentiment-at-7-year-low-weekly-economic-commentary-march-11-2019/#respond Tue, 12 Mar 2019 04:43:12 +0000 https://mfg-nw.bradcable1.com/main-street-sentiment-at-7-year-low-weekly-economic-commentary-march-11-2019/ Pessimism has rapidly infiltrated Main Street’s outlook, according to the Federal Reserve’s Fed) latest edition of the Beige Book.

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KEY TAKEAWAYS
  • Our Beige Book Barometer has dropped to its lowest level since the 2011 European debt crisis.
  • The lower BBB reading is due more to a low level of strong words than a high level of weak words.
  • Mentions of uncertainty reached a new high amid global headwinds.

Click here to download a PDF of this report.

Pessimism has rapidly infiltrated Main Street’s outlook, according to the Federal Reserve’s (Fed) latest edition of the Beige Book. By our measure, sentiment in the March 6 Beige Book, a qualitative assessment of the domestic economy and each of the 12 Fed districts, fell to its lowest point in seven years [Figure 1]. On the surface, the Beige Book’s negative tone is striking compared to recent versions, but context around key words is especially important in this edition.

TRADE-RELATED WEAKNESS

Economic reports are important for clues on economic health and macro trends, but the Beige Book provides a window into Main Street’s perspective, offering valuable color on how larger trends are affecting U.S. businesses. In the Beige Book, the Fed presents qualitative observations made by community bankers and business owners about economic (housing, labor market, manufacturing nonresidential construction, prices, tourism, wages) and banking (lending conditions, loan demand, loan quality) conditions. The latest Beige Book, which is produced eight times a year, was compiled in the weeks before February 25 and published March 6.

At LPL Research, we maintain a straightforward but informative indicator called the Beige Book Barometer (BBB), which helps us gauge Main Street’s sentiment by looking at how frequently key words and phrases appear in the Beige Book. The overall BBB measures the difference between the number of times the word “strong” or its variants appears in each Beige Book, and the number of times the word “weak” or its variants appears. When the BBB is declining, it suggests the economy may be deteriorating; when it’s advancing, it suggests the economy is likely improving.

The BBB has fallen to 15 in March, the lowest level since October 2011 (the peak of the European debt crisis). Strong words fell by 20, while weak words climbed by 21, resulting in the biggest drop for our BBB since March 2016. In the January edition, we noted that oil districts heavily contributed to a lower BBB reading, but that wasn’t the case this time. Excluding the oil districts, the BBB dropped to 15 in March from 48 in January. Sentiment declined in 10 of 14 Fed districts, with New York, Boston, and Richmond posting the worst declines.

A broad-based decline in sentiment is of some concern, however, about half of the 34 references to weakness were concerns about traderelated subjects: global demand, agriculture, manufacturing, and port activity. These concerns are legitimate and have been reflected in economic and market data for a few months now amid the U.S.-China trade dispute. Gauges of U.S. manufacturing health fell to multiyear lows in February, the U.S. trade gap has widened notably, and agriculture prices have dropped about 20% since the first tariffs were implemented a year ago. Trade- related repercussions are clearly bleeding into Main Street’s operations, but we expect these impacts to subside once the United States and China reach an agreement. We’ve seen positive momentum on the trade front recently and resolution may come soon.

The BBB reading was also unusually low because of the low number of strong words, not because of the high number of weak words. Strong words have declined by 44 since the BBB reached a 2.5-year high in July 2018, while weak words have increased by 22 over the same period. Since 2005, the average BBB reading has been 55 when there have been 30 to 40 mentions of weakness.

INCREASING UNCERTAINTY

Main Street is also increasingly uncertain about the economic outlook. Total strong and weak words have hovered around the lowest level since 2005, while mentions of uncertainty have climbed to the highest levels in data going back to 2015. Beige Book respondents are finding it more difficult to characterize current economic conditions and set expectations, so they’re just increasingly citing uncertainty.

To us, this is a reflection of the multiple headwinds weighing on U.S. businesses, including one that has already been resolved: the most recent government shutdown. The survey period captured the second half (and the aftermath) of a historic 35-day government shutdown, which clearly dampened sentiment. The word “shutdown” appeared 22 times in the latest Beige Book, compared to the two times it showed up in the previous Beige Book. About half of the Fed districts cited the government shutdown for slowing economic activity, and Richmond, which includes D.C.-area businesses, had one of the biggest declines in sentiment among Fed districts.

Overall, we see Main Street struggling with uncertainty more than definitive signs of sustained weakness, which leads us to think this dip in sentiment is temporary. The last time the BBB reached these levels was when the U.S. economy was weathering fallout from the European debt crisis. In that period, the BBB briefly dipped below zero (in September 2011) before climbing back to a multiyear high in April 2012.

CONCLUSION

We’re in the midst of a complicated economic environment. U.S. businesses and consumers have to contend with conflicting trade and political headlines, and many recent economic reports have missed consensus estimates, some by unusually wide margins. Still, the bulk of economic data we’ve seen recently has been sound, business and consumer sentiment have started to recover, and leading indicators we track still indicate low odds of a recession. Because of this, we see lower Beige Book sentiment as a consequence of lingering uncertainty more than definitive weakness. Based on recent signals, we wouldn’t be surprised to see softer-than-expected growth at the beginning of
this year, followed by a solid rebound in economic activity once trade risk is removed.

 
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.

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.

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 #1-829893 (Exp. 03/20)

The post Main Street Sentiment At 7-Year Low | Weekly Economic Commentary | March 11, 2019 appeared first on Meridian Financial Group.

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Bull Market Reaches 10 Years | Client Letter by John Lynch | March 7, 2019 https://mfg-nw.net/bull-market-reaches-10-years-client-letter-by-john-lynch-march-7-2019/ https://mfg-nw.net/bull-market-reaches-10-years-client-letter-by-john-lynch-march-7-2019/#respond Fri, 08 Mar 2019 03:53:06 +0000 https://mfg-nw.bradcable1.com/bull-market-reaches-10-years-client-letter-by-john-lynch-march-7-2019/ The S&P 500 Index has staged an impressive rally after nearly entering a bear market December 24, with U.S. stocks notching their best start to a year since 1991.

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The S&P 500 Index has staged an impressive rally after nearly entering a bear market December 24, with U.S. stocks notching their best start to a year since 1991.

Stocks have climbed the “wall of worry” once again, but global uncertainty persists as the bull market nears its tenth anniversary. While the road to new market highs could get a little bumpy as investors deal with Brexit and China trade concerns, we encourage investors to focus on the fundamentals supporting economic growth and corporate profitability in 2019.

Although recession calls have grown louder over the past several months, we’ve seen mounting evidence that this economic cycle could persevere at least through the end of 2019. The U.S. labor market remains solid, U.S. manufacturing health remains in expansionary territory, and consumer sentiment is starting to recover. Leading economic indicators suggest there’s more runway in this expansion.

A pause in monetary policy tightening may also support U.S. economic health. The Federal Reserve (Fed) has indicated that it will abstain from raising interest rates further until there is more clarity in the global environment. That message has calmed investors’ fears that continued policy tightening could eventually smother future economic growth. Inflation remains at healthy levels; however, if there are signs of wages growing too rapidly, another interest rate hike may occur, possibly in the second half of this year, to help manage inflation. Even if this happens, we believe slightly higher rates won’t derail the economic trajectory.

Corporate profit growth should also support U.S. stocks, as earnings for S&P 500 companies grew last year. While we expect the pace of corporate profit growth to moderate, we believe stock performance over the rest of this year can at least match the mid-single-digit earnings growth that we expect for the S&P 500 in 2019.

Seasonality and momentum are also on investors’sides.In 27 of the years since 1950,the S&P 500 has closed up in both January and February,and it has gained in the final 10 months of 25 out of those 27 years.

Though we have lowered some of our economic and interest rate forecasts in response to a patient Fed and slowing global growth, our overall view hasn’t wavered. We believe the pieces are in place for a continued economic expansion, and we look for stocks to power through periodic bouts of uncertainty and occasional volatility.

As always, we encourage you to contact your 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.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

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.

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.

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.

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 #1-829339 (Exp. 03/20)

The post Bull Market Reaches 10 Years | Client Letter by John Lynch | March 7, 2019 appeared first on Meridian Financial Group.

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The Bull Turns 10 | Weekly Market Commentary | March 4, 2019 https://mfg-nw.net/the-bull-turns-10-weekly-market-commentary-march-4-2019/ https://mfg-nw.net/the-bull-turns-10-weekly-market-commentary-march-4-2019/#respond Tue, 05 Mar 2019 05:10:00 +0000 https://mfg-nw.bradcable1.com/the-bull-turns-10-weekly-market-commentary-march-4-2019/ During the 10-year bull market, the S&P 500 Index has more than quadrupled in value.

The post The Bull Turns 10 | Weekly Market Commentary | March 4, 2019 appeared first on Meridian Financial Group.

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KEY TAKEAWAYS
  • During the 10-year bull market, the S&P 500 Index has more than quadrupled in value.
  • It might be the longest bull market, but the 1990s bull market saw substantially higher returns.
  • Market breadth continues to support higher equity prices and eventual new highs.

Click here to download a PDF of this report.

The bull market will celebrate its tenth birthday on March 9, 2019. During that period, the S&P 500 Index has increased more than fourfold in value, producing a total return of 410% (17.7% annualized) while rising 314% in price. Concerns over the global economy, along with a potential policy mistake by the Federal Reserve (Fed) and the trade dispute with China, all have many wondering just how much the longest bull market ever could have left in the tank. This week, we’ll show why this bull market is indeed alive and well and could make it to 11 next year.

THE LONGEST BULL, BUT…

On March 9, 2009, the S&P 500 closed at 676.53, marking the low point for the worst bear market in stocks since the Great Depression. Few believed it possible at the time, but that marked the beginning of the longest bull market, at 120 months, since World War II [Figure 1].

But while this might be the longest bull market ever, it isn’t the strongest. Stock prices in the 1990s bull market increased by 417% at the peak, morethan 100 percentage points above the current bull market. This comparison is reassuring, as it shows this bull might not be as extended as many think.

Although it may feel like this bull market has done nothing but go up for 10 straight years, that couldn’t be further from the truth. In fact, this bull market is the only one ever with two 20% or more declines based on intraday prices. In October 2011 and again in December 2018, the S&P 500 fell 20% from prior highs, only to rally by the daily close to narrowly avoid entering a bear market.

It’s worth noting that the S&P 500 hasn’t made a new high since September 20, 2018, so one could argue this bull market may have ended then. We can’t disagree, but with the S&P 500 only 5% away from making new highs, for the sake of argument, we’re going to assume this bull market is still alive and that the S&P 500 can make new highs later this year.

THREE DEVELOPMENTS

Near term, from a technical analysis perspective the stock market is clearly overbought, suggesting a break may be warranted and could come at any time. Additionally, we see potential warnings signs from put/call ratios becoming too complacent (market participants are not doing a lot of hedging against potential stock market losses) and investor sentiment polls revealing too many bulls, which makes sense after the 19% rally since December 24. Here’s the catch though: These are short-term sentiment measures—in the bigger picture, we have identified three signs that we could still be a long way from the euphoria we tend to see at major market peaks.

  • According to the Commodity Futures Trading Commission, speculators have their largest short position against the S&P 500 since November 2016.
  • According to Emerging Portfolio Fund Research, $30 billion has been pulled out of global mutual funds in 2019, even as many global stock markets have risen by double digits.
  • According to Bloomberg, 6% of all analyst ratings are sells, which is the highest level in nearly two years.

MARKET BREADTH STILL STRONG

As we discussed here last week, the underlying fundamental backdrop remains quite positive, we’re looking for earnings to potentially surprise to the upside in 2019, and we think stock valuations are still attractive relative to bonds despite this year’s gains.

Turning to market technicals, market breadth measures how many stocks are participating in moves in broader indexes. One of the easiest ways to measure this is via advance/decline (A/D) lines [Figure 2].An A/D line is a ratio of how many stocks go up versus down each day for a stock exchange or index. The thinking is, if many stocks drive broad market gains, then there are plenty of buyers and the upward trend should likely continue, all else being equal. On the other hand, if an upward move in a broad market gauge is driven by relatively few stocks, this can be a warning sign of cracks in the bull’s armor.

One sign that market breadth continues to suggest higher overall equity prices is that various A/D lines have broken out to new all-time highs this month. In fact, the NYSE Common Stock Only A/D line has a good history of leading equities higher.With that indicator making new highs currently, new highs in equity markets might not be too far away.

CONCLUSION

Despite its old age, we believe the 10-year-old bull market has quite a bit left in its tank. The ongoing benefits of fiscal policy, coupled with a more patient Fed, lead us to believe the economy may surprise to the upside in the second half of 2019. We don’t think it will be an easy ride, but we continue to expect eventual new highs in equity markets and reiterate our fair value target of 3,000 for the S&P 500, about 7% above Friday’s closing index price of 2,804.

 

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 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.

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.

The NYSE Composite Index is a float-adjusted market-capitalization weighted index which includes all common stocks listed on the NYSE, including ADRs, REITs, and tracking stocks and listings of foreign companies. The index was recalculated to reflect a base value of 5,000 as of December 31, 2002.

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.

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 #1-828249 (Exp. 03/20)

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An Aging Cycle | Weekly Economic Commentary | March 4, 2019 https://mfg-nw.net/an-aging-cycle-weekly-economic-commentary-march-4-2019/ https://mfg-nw.net/an-aging-cycle-weekly-economic-commentary-march-4-2019/#respond Tue, 05 Mar 2019 05:03:11 +0000 https://mfg-nw.bradcable1.com/an-aging-cycle-weekly-economic-commentary-march-4-2019/ As the U.S. stock rally’s double-digit birthday nears, we’ve reflected a lot on the durability of he current economic cycle.

The post An Aging Cycle | Weekly Economic Commentary | March 4, 2019 appeared first on Meridian Financial Group.

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KEY TAKEAWAYS
  • The current economic expansion will become the longest ever in July.
  • Slow (but steady) growth and accommodative policy have made this expansion especially durable.
  • We still see many signals that this cycle could persevere at least through the end of 2019.

Click here to download a PDF of this report.

The tenth anniversary of the S&P 500 Index bull market is coming up on March 9. As the U.S. stock rally’s double-digit birthday nears, we’ve reflected a lot on the durability of the current economic cycle. The U.S. economic expansion is entering its 118th month, on track to become the longest recovery on record in July. Some things in life get better with age, but recession calls have grown louder recently amid heightened global uncertainty and market volatility. While it is important to be mindful of where we are in the cycle, we see a lot of evidence that this economic cycle has enough fuel left in its tank to persevere at least through the end of this year and could prove durable.

SLOW, BUT STEADY

In past economic cycles, slow but steady growth has won the race. Since 1970, cycles with annual gross domestic product (GDP) growth higher than 4% lasted about five years on average, while cycles with annual growth lower than 4% lasted about nine years on average [Figure 1]. While slow growth in this cycle has been frustrating at times, especially after a swift and painful downturn, it has helped extend the life of this cycle and keep excesses in check. Inflation-adjusted GDP has expanded an average of 2.3% annually in this cycle, the slowest pace of growth among all expansions in recent memory, and a key contributor to the expansion’s near-record age.

Steady economic growth has been helped in part by extraordinarily supportive monetary policy for much of the cycle and a cautious, gradual approach to tightening. The Federal Reserve’s (Fed) supportive policy efforts have been in place for many years, but policymakers only started increasing rates in December 2015, more than six years into the expansion. Since then, the Fed has implemented nine 25-basis point (.25%) hikes, matching the slowest Fed hiking pace in tightening cycles since 1970. This tightening cycle is one of the longest on record, yet inflation-adjusted interest rates are barely above zero. Inflation (measured by core personal consumption expenditures) has been climbing since 2015, but it’s still only hovering around the Fed’s 2% target, and wage growth, while healthy, remains manageable. Muted inflation can be attributed to several structural factors like demographics and globalization, but the Fed has played a pivotal role in promoting stable pricing while restricting growth only minimally. We believe this pragmatic and gradual approach will continue to be effective, and we see minimal chances of a policy mistake en route to a soft landing from the current modest slowdown.

The lingering effects of fiscal stimulus may also provide an extra boost to the expansion, especially if companies ramp up capital expenditures once we see a United States-China trade resolution. Supply-side fiscal stimulus can have a positive impact on output for several years as consumers and businesses reap the benefits of tax cuts and fiscal incentives.

ENCOURAGING DATA

While we’ve noted recently that coincident economic reports have sent mixed messages about economic conditions, leading economic data hint to more runway in the expansion. The Conference Board’s Leading Economic Index (LEI), composed of 10 leading economic indicators, rose 3.5% year over year in January, its 110th straight gain. Leading indicators typically show pronounced weakness as the economy approaches recession, and year-over-year growth in the gauge has turned negative an average of seven months before each recession going back to 1970 [Figure 2] . The current rate of change remains well off that mark.

Other indicators we track in our Recession Watch Dashboard also show low odds of a recession over the next 12 months. U.S. companies’ earnings growth has been solid, short-term yields have not fallen below long- term yields (known as yield curve inversion), manufacturing health is sound, market valuations are reasonable, and our sentiment indicator based on the Fed’s Beige Book report shows Main Street remains relatively upbeat. Positive signs in leading indicators and a tight job market also infer that weakness in current reports is likely related to global headwinds that have slowed but have not derailed economic momentum.

GLOBAL LIQUIDITY

We’ve highlighted how the Fed’s accommodation has supported economic growth over the past several years. However, the United States’ current economic expansion has also benefitted from a wave of central bank accommodation across the globe, thanks to a staggered global economic recovery. Balance sheets for major central banks are still around the biggest they’ve been since the financial crisis amid tepid growth internationally, and interest rates are low worldwide, incentivizing borrowing and investment. This accommodative environment (and resulting global growth potential) will likely continue to support the domestic recovery, especially as the Fed pauses on rate hikes. The Fed has also communicated that it will be flexible on reducing the size of its own balance sheet and will likely maintain a larger balance sheet compared to before the 2008 financial crisis.

Ample accommodation this late in a cycle can potentially contribute to a build-up in economic excesses. However, we have yet to see any alarming signs of late-cycle excesses or “red flags” in the economy.

CONCLUSION

While it’s important to be mindful of where we are in the economic cycle, later-cycle economies can continue to exhibit stable growth for years. We’re maintaining our positive outlook for 2019, thanks to our conviction in sound fundamentals supporting moderate economic growth. At the same time, we remain on watch for any threatening signs of slowing or excess, and we’ll continue to keep an eye on trusted economic and market signals.

 
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.

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.

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 #1-828237 (Exp. 03/20)

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Five Key Questions | Weekly Market Commentary | February 25, 2019 https://mfg-nw.net/five-key-questions-weekly-market-commentary-february-25-2019/ https://mfg-nw.net/five-key-questions-weekly-market-commentary-february-25-2019/#respond Tue, 26 Feb 2019 05:21:36 +0000 https://mfg-nw.bradcable1.com/five-key-questions-weekly-market-commentary-february-25-2019/ Recent gains eliminated oversold conditions and pushed valuations higher, raising the bar for further gains and making the next leg higher more difficult to achieve.

The post Five Key Questions | Weekly Market Commentary | February 25, 2019 appeared first on Meridian Financial Group.

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KEY TAKEAWAYS
  • Stocks may keep going higher, but the easy gains likely have been made.
  • Stock valuations, when compared with bond yields, are actually historically cheap.
  • The overall technical backdrop supports a continuation of the bull market.

Click here to download a PDF of this report.

This week we reassess the stock market landscape following the latest rally. Specifically, we answer five of the most common questions we’ve received recently. We use multiple lenses to assess the stock market, including fundamentals, valuations, and technical analysis.

CAN STOCKS KEEP GOING HIGHER?

Since its low on December 24, 2018, the S&P 500 Index is up 18.8% as of February 22. Gains have been driven by progress in trade negotiations and a shift in the Federal Reserve’s (Fed) communication strategy; however, extreme oversold conditions and low valuations following the worst fourth quarter for stocks since the Great Depression provided an extra boost.

Recent gains eliminated oversold conditions and pushed valuations higher, raising the bar for further gains and making the next leg higher more difficult to achieve. We still see potential for some valuation expansion should the trade dispute be resolved and steady U.S. economic growth continue, but earnings may have to do the heavy lifting to push the S&P 500 to our year-end fair value target of 3000 by December 31, 2019.

IS EARNINGS GROWTH STRONG ENOUGH TO PROPEL STOCKS HIGHER?

We believe stock performance over the rest of the year can at least match the mid-single-digit earnings growth that we expect for the S&P 500 in 2019. A little bit of valuation expansion may help, but we think earnings will be enough to get stocks back to prior highs this year (2930 on the S&P 500) and potentially to our year-end S&P 500 fair value target of 3000.

Though a lot of attention has been paid to cuts in 2019 earnings estimates due to tariffs and slower global economic growth, the U.S. economic backdrop remains solid, manufacturing activity continues to expand (based on the latest Institute for Supply Management [ISM] survey), and the consumer spending outlook is well supported by a healthy labor market.

Tariffs are the primary risk to earnings. Other risks include possible margin pressures from higher wages or another potential leg down for European economies.

HAVE STOCKS GOT TEN TOO EXPENSIVE?

We don’t think so. With the S&P 500 at a forward price-to-earnings ratio of about 16, valuations are roughly in line with the average over the past few decades. Factor in still-low interest rates and inflation, which increase equities’ attractiveness versus other asset classes like fixed income, and we would argue stocks are still attractively valued and modest valuation expansion this year is likely.

An easy way to make this point is to compare the earnings generated by stocks with bond yields, which are essentially earnings generated by bonds. We do this by comparing the earnings yield for the S&P 500 Index (S&P 500 earnings per share divided by the index price level) with the yield on the 10-year Treasury.

This statistic, referred to as the equity risk premium (ERP), is currently over 3% after averaging about 0.5% over the past six decades. Historically, a higher ERP has pointed to better future stock market performance. Since 1960, when the gap between the earnings yield and 10-year Treasury yield has been above 3% (as it is now), the S&P 500 has gained 12.4% on average over the following 12 months [Figure 1].

DO WE NEED A RETEST?

We believe a retest of the December 24, 2018, low for the S&P 500, near 2350, is unlikely. As we wrote here last week, with more than 70% of S&P 500 components recently hitting 20-day highs, we believe pullbacks in the near term will be modest.

Market breadth, which measures how many stocks are participating in the movement of broader indexes, is another positive sign. The NYSE Common Stock Only Advance/Decline line recently broke out to new all-time highs. We’ve seen time and time again that new highs in market breadth has led to eventual new highs in price.

Lastly, more than 90% of the components in the S&P 500 recently were trading above their 50-day moving average. While it may seem like stocks are overbought based on this metric, as Figure 2 shows, being overbought by this measure is actually quite bullish.

IS SENTIMENT NOW OVERLY BULLISH?

We don’t think so. As discussed last week, the overall technical backdrop continues to look strong, but one other substantial positive is that investor sentiment is still not near levels of optimism that we would consider to be a major warning sign. We use several surveys to gauge sentiment, including the AAII bull-bear survey and the CNN Money Fear and Greed Index, as well as investor flows.

History has shown that the crowd can actually be right during trends, but it also tends to be wrong at extremes. This is why sentiment can be an important contrarian indicator. If everyone who might become bearish has already sold, only buyers are left. The reverse also applies. We see this contained optimism as healthy and, in fact, are surprised there isn’t more excitement after such a powerful rally.

CONCLUSION

The questions are mounting after the significant gains since the December 24 lows. The good news is that our expectation for steady earnings growth, solid technicals, and nice valuations amid a healthy economic backdrop support further gains for stocks throughout 2019. We reiterate our year-end fair value range of 3000 for the S&P 500 from our Outlook 2019 publication.

 

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. Any economic forecasts set forth in the presentation 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 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.

Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

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

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.

The Institute for Supply Management (ISM) Manufacturing Index is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change.

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.

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