Meridian Financial Group https://mfg-nw.net Sun, 21 Jul 2019 14:31:12 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 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 | July 19, 2019 https://mfg-nw.net/portfolio-compass-july-19-2019/ https://mfg-nw.net/portfolio-compass-july-19-2019/#respond Sun, 21 Jul 2019 12:40:16 +0000 https://mfg-nw.net/portfolio-compass-july-19-2019/ Stock valuations remain favorable in our view even with the S&P 500 Index near our year-end fair value target of 3,000...

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COMPASS CHANGES

  • No changes

INVESTMENT TAKEAWAYS

  • Stock valuations remain favorable in our view even with the S&P 500 Index near our year-end fair value target of 3,000. We would consider raising this forecast if clarity on trade and monetary policy result in an improved earnings outlook.*
  • We maintain our slight preference for value due to attractive relative valuations, fiscal stimulus impacts, and our positive financials sector view.
  • As the business cycle ages, and the dollar’s uptrend potentially reverses, large caps may sustain market leadership.
  • Population growth, economic momentum, valuations, and prospects for progress on U.S.-China trade relations all favor emerging markets (EM).
  • Slower but still solid economic growth and modest inflationary pressure may be headwinds for fixed income. However, the pause by the Federal Reserve (Fed) and potential for a summer rate cut reduce the near-term risk of higher short-term interest rates.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment-grade corporates (IGC) and mortgage-backed securities (MBS) over Treasuries, in suitable strategies. MBS can provide a diversifying source of yield within the investment-grade space, while economic growth has been supportive of IGCs. High-yield corporates could become an attractive alternative to equities on a risk-adjusted basis.
  • The past month was strong for U.S. large cap equities, and the S&P 500 is now firmly above the 2018 highs (near 2,930) which may be viewed as tactical support going forward. Importantly, cyclical sectors led the recent advance, while more defensive sectors such as real estate and utilities lagged, something that will likely be necessary for continued gains.

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.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

Tracking #1-874028

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Market Insight Quarterly | Second Quarter 2019 https://mfg-nw.net/market-insight-quarterly-second-quarter-2019/ https://mfg-nw.net/market-insight-quarterly-second-quarter-2019/#respond Sun, 21 Jul 2019 12:25:27 +0000 https://mfg-nw.net/market-insight-quarterly-second-quarter-2019/ First quarter gross domestic product (GDP) rose 3.1%, according to the first revision released May 29...

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Stocks Rise, Rates Fall as Investors Position for Lower Rates

U.S. economy sends mixed signals amid uncertainty. Second quarter data continued to paint the picture of a slowing but still growing economy.

First quarter gross domestic product (GDP) rose 3.1%, according to the first revision released May 29. Although headline growth was revised down, it was still the biggest first-quarter GDP gain since 2015, showing the U.S. economy remained resilient against trade and political headwinds. However, inventories and net exports accounted for about half of first quarter GDP growth, a temporary boost that may take away from growth in future quarters.

Gauges of manufacturing health came in ahead of expectations, but at the slowest rate of growth since 2016. Despite slowing growth, the U.S. job market continued to be a bright spot. Payrolls rose at an above-average pace for the expansion, and the unemployment rate hovered near multidecade lows. In addition, wages grew at a healthy, manageable pace, and productivity grew at its strongest pace since 2010. Overall, leading indicators pointed to low odds of a recession over the next 12 months, even as coincident data wavered.

The Federal Reserve (Fed) chose to keep rates unchanged in the second quarter but opened the door to cuts later this year, dropping the word “patient” from its post-meeting press conference. Fed Chair Jerome Powell stated that policymakers will “act as appropriate to sustain the expansion.” Eight of the 17 Fed members projected a rate cut by the end of 2019 (in the June “dot plot”), and fed fund futures are now pricing in a 100 percent chance of a rate cut at the July meeting.

The S&P 500 Index returned 4.3% during the second quarter, capping off its best first half in more than 20 years. Gains came in April and June, which sandwiched May’s losses amid U.S.-China trade-war fears and slowing global economic growth. Gains in June, which sent the three major averages to record highs, were driven primarily by increasing speculation that the Fed would cut interest rates and by progress in U.S.-China trade talks, including the tariff cease-fire reached at the G20 Summit in Japan at the end of the month. The S&P 500 returned 18.5% in the first half of the year, the best start to a year since 1997.

More globally focused large cap stocks outpaced their smaller peers during the quarter, as tends to occur as economic cycles age, and which may reflect progress on trade talks with China. Strength in the technology sector and weakness in the energy sector helped propel growth stocks over value despite leadership by financials. U.S. stocks outpaced their international counterparts during the quarter. The developed international benchmark, the MSCI EAFE Index, lagged marginally with a 4% return, while the MSCI Emerging Markets Index, up just 0.7%, trailed the S&P 500 by 3.6 percentage points.

Rates fall, bonds gain. Falling interest rates and a generally healthy credit environment drove broad bond market gains, led by investment-grade corporates. The Bloomberg Barclays U.S. Aggregate Index (Agg) returned 3.1% during the quarter as the 10-year Treasury yield fell 40 basis points (0.40%) over the three months. The spread between 10-year and 2-year Treasury yields widened during the quarter while the 3-month/10-year spread inverted in the last five weeks of the quarter.

Investment-grade corporate debt gained 4.3% during the quarter to lead the major fixed income sectors we track. Corporate bonds benefited from their interest rate sensitivity and improving credit spreads relative to Treasuries. Emerging market debt gained 3.8%. Mortgage-backed securities and bank loans, with less interest rate sensitivity, lagged the Agg with returns of 2% and 1.6%, respectively.

Commodities slide. The Bloomberg Commodity Index fell 1.2% in the second quarter, with gains in precious metals offset by declines in industrial metals and natural gas. Commodities’ 5.1% gain in the first half of 2019 significantly trailed equities. Trade tensions and a weaker U.S. dollar boosted precious metals as a whole, while gold received an additional boost by breaking through important technical levels. Oil finished a volatile quarter down slightly, as Iran tensions and trade developments took hold of price action for different periods. Industrial metals lagged on skepticism around a trade deal with China, and natural gas prices fell steeply in part due to seasonal factors. Supply concerns stemming from an unusually rainy planting season boosted wheat and corn.

Managed futures lead alternative investment gains. The HFRX Systematic Diversified Index gained 4.9% during the second quarter, with long fixed-income exposure delivering a majority of the returns. While month-to month equity market performance was volatile, trend-following strategies that maintained or even increased long equity exposure during the quarter rose. Equity-centric strategies disappointed during the quarter, as the HFRX Equity Hedge and HFRX Market Neutral Index returned 0.02% and -0.51%, respectively. Conservative net market exposure in the long/short equity space and the value tilt employed across many market-neutral strategies weighed on performance. Additionally, June’s broad-based equity market gains hindered performance for short exposure.

A Look Forward

At the halfway point of 2019, the U.S. economy has held steady, supported by the continued effects of fiscal stimulus and growing corporate profits. At the same time, trade tensions are weighing on the economic outlook, and slowing global growth and ongoing political uncertainty have forced global central bankers to extend extraordinary support.

We still believe fundamentals are supportive of moderate U.S. GDP growth this year. We believe fiscal stimulus from the Tax Cuts and Jobs Act of 2017, along with decreased regulation and increased government spending, will continue to support the U.S. economy. Progress on trade is central to our forecast. We recently reduced our GDP forecast for the United States slightly to 2.25–2.5%.

Fixed income investors have benefited from falling rates due to subdued consumer inflation, a pause in Fed rate hikes, and demand for U.S. Treasuries. Factoring in our expectation for progress on trade, we look for the 10-year Treasury yield to reach the 2.5–2.75% range in the next 6 to 12 months.

Market valuations remain favorable and within historical norms. We recently reduced our S&P 500 earnings per share forecast to $170 for 2019, mainly because of trade uncertainty, but our year-end S&P 500 fair value estimate remains at 3,000.

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.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

Tracking # 1– 872316

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Market Insight Monthly | June 2019 https://mfg-nw.net/market-insight-monthly-june-2019/ https://mfg-nw.net/market-insight-monthly-june-2019/#respond Wed, 17 Jul 2019 00:50:45 +0000 https://mfg-nw.net/market-insight-monthly-june-2019/ The June jobs report was weaker than expected, fueling worries that trade tensions have infiltrated an otherwise solid U.S. labor market...

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ECONOMY: U.S. ECONOMY MODERATES, FED SHIFTS IN JUNE

U.S. economic data moderated in June as trade tensions plagued the global economy.

Leading indicators slowed, but remained largely resilient against trade headwinds. The Conference Board’s Leading Economic Index (LEI) rose 2.5% year over year in May, its slowest pace of year-over year growth since January 2017. Still, the LEI is squarely in positive territory, signaling future growth.

The June jobs report was weaker than expected, fueling worries that trade tensions have infiltrated an otherwise solid U.S. labor market. Nonfarm payrolls growth fell well short of consensus estimates [Figure 1], and job gains for March and April were both revised down as well. Still, the average pace of payroll gains has remained steady this year, and slowing job creation is typical late in the business cycle.

The pace of consumer inflation continued to soften. The core Consumer Price Index, which excludes food and energy, increased 2% year over year, matching a 15-month low. Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in April, below policymakers’ 2% target.

Wage and input pricing pressures faded. Average hourly earnings rose 3.1% year over year in May, an eight-month low. However, current wage growth is at a level that should continue to bolster consumer confidence without concerns of overheating. Growth in the core Producer Price Index (PPI), which excludes food and energy prices, fell to 2.4% year over year, its fourth straight decline.

U.S. manufacturing deteriorated further. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to its lowest point since October 2016. Markit’s PMI ticked up slightly, according to preliminary June data, but the gauge remained less than a point away from contractionary territory (which is below 50).

Consumer sentiment faltered, as the Conference Board’s Consumer Confidence Index fell to its lowest level since 2017. However, heightened trade tensions didn’t faze corporate sentiment. The National Federation of Independent Business’s measure of business confidence climbed for a fourth straight month. Retail sales rose for a third straight month in May, while new orders for nondefense capital goods climbed. Year-over-year growth in both measures was tepid, suggesting long-term demand is slowing.

Fed Language Shifts

On June 18 the Fed chose to keep rates unchanged, but policymakers prepared investors in a measured fashion for an eventual policy shift [Figure 2]. The Fed dropped its “patient” policy stance in the post-meeting announcement and instead reiterated Fed Chair Jerome Powell’s June 4 comments that policymakers will “act as appropriate to sustain the expansion.”

Still, Powell emphasized in his post-meeting press conference that the U.S. economy is performing “reasonably well” with solid economic fundamentals. The Fed kept its gross domestic product (GDP) growth projection unchanged at 2.1% for the year, in line with average output growth in this expansion.

Financial markets are now overwhelmingly pricing in a July rate cut, with fed fund futures implying a 100% chance of lower rates at the Fed’s July meeting.

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 was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not insured by FDIC/NCUA or Any Other Government Agency | No Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

Tracking # 1-871042

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Central Bank Check-In | Weekly Economic Commentary | July 15, 2019 https://mfg-nw.net/central-bank-check-in-weekly-economic-commentary-july-15-2019/ https://mfg-nw.net/central-bank-check-in-weekly-economic-commentary-july-15-2019/#respond Wed, 17 Jul 2019 00:26:21 +0000 https://mfg-nw.net/central-bank-check-in-weekly-economic-commentary-july-15-2019/ Trade tensions and political pressures are forcing global central banks to loosen monetary policy...

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KEY TAKEAWAYS
  • Recent Fed commentary reinforces the chance of a July rate cut.
  • Trade tensions and political pressures are forcing global central banks to loosen monetary policy
  • Easing policy may provide a short-term boost, but the global economy needs trade resolution.

Click here to download a PDF of this report.

Financial markets are focused on U.S. monetary policy, but the Federal Reserve (Fed) is only part of the story. Central banks around the world are embarking on a marked policy shift as trade tensions pressure the global economy and government becomes more intertwined with policy decisions. Global monetary policy is still historically loose, but policymakers abroad are searching for alternatives to jump-start growth, with no trade resolution in sight [Figure 1].

FED POISED TO CUT

The Fed’s policy shifts this year have been the most watched, as the U.S. central bank dictates monetary policy for the world’s largest economy and most important financial centers.

It is no secret that the Fed is prepared to cut rates later this month, a move that was heavily implied when language about being “patient,” intending to show the Fed wasn’t in a rush to continue to hike rates, was removed from the Fed’s June meeting statement. With further hikes no longer really on the table and cuts under discussion, the Fed reframed its messaging. Minutes from the Fed’s June meeting showed “several” policymakers argued a cut could be “appropriate policy from a risk management perspective” to cushion the economy against shocks from trade tensions and slowing global growth. Discussion about the U.S. economy in the minutes was largely optimistic, but Fed members frequently mentioned uncertainties and downside risks. Fed Chair Jerome Powell’s testimonies to Congress echoed that sentiment. Powell repeated the Fed’s view of a solid U.S. economy, but maintained that uncertainty from crosscurrents, accompanied by muted inflation, have continued to weigh on the domestic outlook.

We don’t see an argument for a rate cut in recent economic data, and we agree with Powell’s assessment of an economy in “good shape.” However, the bond market has indicated that U.S. monetary policy is too tight for the uncertain trade environment. The Fed committed to patience and flexibility at the beginning of this year, but global economic conditions continue to deteriorate, and the still-inverted yield curve (short-term rates higher than long-term) has effectively tied policymakers’ hands. More importantly, an “insurance” cut could provide a buffer if uncertainty continues to weigh on growth, reducing the chances of a policy mistake or a rush to cut rates before a recession.

ECB EXPLORES MORE EASING

Few central bankers have fought as tough of a battle over the past several years as those at the European Central Bank (ECB). ECB policymakers have attempted to spark growth and inflation with large scale asset purchases, but structural issues, austerity measures, and political upheavals have largely overwhelmed benefits from looser policy. Now, global trade tensions and the threat of auto tariffs have put another dent in Europe’s sputtering economy, and the ECB has few options available with its policy rate still at zero.

At the ECB’s June meeting, policymakers pledged to hold rates at current levels at least through mid 2020 and used the phrase “as long as necessary” to convey flexibility to do more as needed. What “more” would be has yet to be determined, but there is speculation that the ECB could reinstate quantitative easing or consider negative rates.

To make matters more complicated, ECB President Mario Draghi completes his term at the end of October. Christine LaGarde, former managing director of the International Monetary Fund, was chosen to take Draghi’s spot as head of the ECB. Even though LaGarde is well qualified, the change will come with new leadership and communication strategies. Even if largely consistent, there will be an adjustment period for global markets, with pivotal policy decisions looming. The ECB has all but promised more accommodation, and LaGarde will likely be tasked with introducing new policy measures early in her tenure. We have observed a pattern of markets testing new Fed chairs, and we would not be surprised to see a similar pattern in Europe.

To be clear, these are transitional pains the ECB likely would have faced no matter who was nominated to lead. Still, Draghi’s retirement complicates the ECB’s increasingly challenging situation at hand.

POLITICAL PRESSURES

Elsewhere, central banks are dealing with political pressures fueled by economic stress. In June, a governor at India’s central bank quit unexpectedly amid Prime Minister Narendra Modi’s ongoing pressure for looser policy, the second governor departure in the last seven months. A few weeks later, President Recep Erdogan fired the head of Turkey’s central bank and demanded policymakers provide “stronger support for our economic program.” Other regions are tackling different problems than the U.S. Fed, but many central banks have faced the same challenge of maintaining independence in a politically charged environment. Ultimately, we think increasing political heat internationally could lead to more dramatic policy decisions and encourage other governments to follow suit.

CONCLUSION

The Fed is poised to cut rates in July, as Powell’s comments and June meeting minutes reinforced last week. If that happens, we encourage investors to view the rate adjustment as a course correction and not as an attempt to get in front of an impending recession.

Central banks globally are fighting more uphill battles, though, and events this summer show the economic stress has led to government intervention in monetary policy in other regions. Looser policy may be the best short-term solution to combat the economic consequences of the U.S.- China trade dispute during an extended negotiating period. However, more accommodation may not be enough to counter long-term weakness if an agreement isn’t reached.

 

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.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

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 #1-872544

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Q2 Earnings: Muddling Through | Weekly Market Commentary | July 15, 2019 https://mfg-nw.net/q2-earnings-muddling-through-weekly-market-commentary-july-15-2019/ https://mfg-nw.net/q2-earnings-muddling-through-weekly-market-commentary-july-15-2019/#respond Tue, 16 Jul 2019 23:58:05 +0000 https://mfg-nw.net/q2-earnings-muddling-through-weekly-market-commentary-july-15-2019/ We expect slightly positive earnings growth in the second quarter, with substantial drag from falling technology sector earnings...

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KEY TAKEAWAYS
  • We expect slightly positive earnings growth in the second quarter, with substantial drag from falling technology sector earnings.
  • The big question for investors this quarter is how much tariff costs are reflected in analysts’ earnings estimates.
  • We expect better-than expected earnings may be a catalyst for stock market gains in the second half of this year.

Click here to download a PDF of this report.

Second quarter earnings season gets rolling this week. Consensus estimates are calling for a modest year-over-year decline in S&P 500 Index earnings amid the downshift in U.S. and international economic growth, tariffs, and ongoing trade tensions. Quarterly earnings almost always beat quarter-end consensus estimates—this quarter will likely be the 41st in a row to do that—so we expect a slight year-over-year gain that would continue the stretch of consecutive quarterly earnings gains since the 2016 earnings recession [Figure 1]. Nearly 60 companies will report this week (July 15–19). Here we preview second-quarter earnings season and share our outlook for profits in the second half of 2019.

LOW BAR AGAIN

Seventy-seven percent of companies issuing guidance for the second quarter have lowered estimates, which is above the 5-year average of 70%, according to FactSet data, lowering the bar so to speak. However, the overall consensus S&P 500 earnings estimate has fallen only by a below-average 2.6 percentage points over the past three months, much less than the 7 percentage point reduction in first quarter 2019 S&P 500 earnings expectations ahead of the first-quarter reporting season. We think earnings stand a good chance of beating estimates by the typical 3–4% when factoring in the lower bar, a generally steady U.S. economy, the results already in for May 31 for quarter-end companies, and the latest trade developments (more on that below).

THE BIG QUESTION

The big question for investors this quarter is how much tariff costs are reflected in analysts’ earnings estimates. China tariffs remained in place after President Trump’s meeting with China President Xi at the G20 Summit in Japan last month. We suspect those tariffs are mostly reflected in second-quarter estimates (and probably third quarter as well). Estimates were reduced significantly earlier in the year, and companies have already taken steps to mitigate impacts by altering supply chains. Tariffs have also received a lot of attention on earnings conference calls this year, giving analysts a fair amount of information to react to.

We will be closely watching management commentary on trade and estimate revisions for clues on these impacts during reporting season.

GREENBACK IMPACT

A stronger U.S. dollar may weigh on second-quarter earnings, as it did in the first quarter. The average price of the U.S. Dollar Index in the second quarter of 2019 was 5% above year-ago levels. As a result, currency may cut 1–2 percentage points off S&P 500 earnings for the second quarter (roughly 40% of S&P 500 companies’ profits come from outside the United States). The dollar’s weight on profits has already been a primary theme, as half of the 24 companies that have reported second-quarter results thus far have cited currency headwinds. The drag will likely continue through the current quarter, although we expect the Federal Reserve’s policy U-turn to limit further dollar strength and eventually weaken the earnings headwind.

SECTOR DRAGS

Technology company earnings will be especially impactful this season due to low expectations and the sector’s large weight in the S&P 500 Index [Figure 2]. The sector is expected to report a double-digit earnings decline, and if realized, technology earnings could be a significant drag on overall index profits. In fact, more than two-thirds of the second quarter’s estimated 3% earnings decline is from technology, based on current FactSet estimates. The sector’s biggest constituent, Apple, is expected to drag the overall S&P 500 earnings down one-half of a percentage point by itself, based on its estimated 16% drop in earnings.

Oil price fluctuations are likely to cut into energy companies’ profits. The average oil price during the second quarter was just a hair below $60 per barrel, 11% below the average price in the yearago quarter. That decline is similar to what WTI Crude experienced in the first quarter of 2019 when energy earnings fell 26%. This quarter likely won’t see that much of a drop, but energy sector earnings are unlikely to grow, and neither are earnings for the materials sector. Based on consensus estimates, the two natural resource sectors, which are both China sensitive, are expected to clip nearly one full percentage point from the overall S&P 500 earnings growth rate for the quarter.

OUTLOOK FOR 2019 PROFITS

In early June we slightly reduced our 2019 S&P 500 earnings per share (EPS) forecast from $172.50 to $170 due to heightened trade tensions with China.* If achieved, that $170 EPS number would represent roughly 5–6% EPS growth. Our forecast is above Wall Street’s consensus of $167 (source: FactSet), which we suspect is too low considering the mostly positive fundamental environment.

Trade is a huge wildcard—hitting our EPS number likely requires some resolution to the U.S.-China trade dispute—but we think better-than-expected earnings may be a positive stock market catalyst over the second half of 2019. Though President Trump’s meeting with President Xi at the G20 Summit in Japan prevented additional tariffs from being implemented, substantial tariffs remain in place.

CONCLUSION

Earnings are in a bit of a lull. Slower growth amid trade uncertainty and tariffs will likely wipe out most of the earnings growth we might have had, and second-quarter earnings will probably be only marginally positive when all results are in.

Nonetheless, we think fundamentals of the economy, including fiscal stimulus put in place over the past two years, support improving earnings growth later this year. We think the current macroeconomic environment has mid-single-digit earnings growth power. But for now, tariffs on Chinese goods are hurting U.S. company profit margins. Meanwhile, trade uncertainty has weighed on business confidence and hampered capital investment, which limits revenue growth opportunities for corporate America.

Until we get more clarity on trade, earnings are unlikely to grow much. We think we will get some of that clarity over the next few months, which supports our belief that consensus estimates for S&P 500 EPS may be too low.

 

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.

Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.

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.

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.

DEFINITIONS

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

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 was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

Tracking #1-872554

The post Q2 Earnings: Muddling Through | Weekly Market Commentary | July 15, 2019 appeared first on Meridian Financial Group.

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Taking Stock At The Halfway Mark | Weekly Market Commentary | July 8, 2019 https://mfg-nw.net/taking-stock-at-the-halfway-mark-weekly-market-commentary-july-8-2019/ https://mfg-nw.net/taking-stock-at-the-halfway-mark-weekly-market-commentary-july-8-2019/#respond Tue, 09 Jul 2019 02:36:25 +0000 https://mfg-nw.net/taking-stock-at-the-halfway-mark-weekly-market-commentary-july-8-2019/ The main drivers of the strong first half were the Federal Reserve’s (Fed) U-turn on monetary policy and progress on trade...

The post Taking Stock At The Halfway Mark | Weekly Market Commentary | July 8, 2019 appeared first on Meridian Financial Group.

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KEY TAKEAWAYS
    • The S&P 500 delivered its best first-half performance since 1997, raising questions about what that strong start may mean for the second half.
    • Stocks’ track record after the strongest first-half rallies is mixed but points to modest gains ahead.
    • We would consider this bull market to have a stronger foundation if it had more sustained leadership from cyclical sectors and relied less on central bank policy

    Click here to download a PDF of this report.

    Even after such a strong first half of this year, we think stocks may have more left in the tank. The S&P 500 Index gained 17.4% during the first half of 2019—an excellent performance—even though a decent chunk of those gains reversed the 2018 fourth quarter losses. Putting that six-month performance into perspective, it was the best start to a year for the stock market since 1997, and its tenth-best start since 1950. This week we recap the first half and analyze prior strong starts to see what we might expect in the second half of 2019.

    FIRST-HALF RECAP

    The main drivers of the strong first half were the Federal Reserve’s (Fed) U-turn on monetary policy and progress on trade. The Fed’s reversal helped not only the market’s expectations for the U.S. economy but also supported stock valuations by pushing interest rates lower.

    Even with the S&P 500 at record highs and a less rosy corporate profit growth outlook due to tariffs and trade uncertainty, the forward price-to-earnings ratio (P/E) for the index is still only 17, as of July 3, 2019. At that valuation, with such low interest rates, stocks look more enticing relative to bonds. The latest move in the 10-year Treasury yield below 2%—its lowest level since November 2016—was driven by President Trump’s recent nominees to the Federal Reserve Board, who are expected to favor lower rates, and expectations that Christine Lagarde, current head of the International Monetary Fund (IMF), will carry on Mario Draghi’s preference for lower rates as the new head of the European Central Bank.

    Although progress on trade has been uneven, the United States and China came close to an agreement in April before talks derailed, fueling optimism that a more comprehensive deal to reduce or eliminate tariffs may be coming this fall. President Trump and China’s President Xi have since resumed negotiations after the Trump administration removed the latest tariff threat, adding to the optimism. Removing the tariff threats from Mexico and Europe (mainly on autos) was also well received by markets.

    Looking ahead, the Democrats may delay ratifying NAFTA 2.0 (the United States Mexico-Canada Agreement, or USMCA) until after the 2020 election, and the Trump administration could slap tariffs on European autos this fall. These concerns didn’t stop stocks from hitting more new highs last week but remain on our radar.

    The strong first half was particularly impressive given slower economic and profit growth. Although first quarter gross domestic product (GDP) growth in the United States was solid at 3.1% annualized, the details suggest slower growth in coming quarters.

    And even though first quarter earnings results were better than feared, the earnings increase from S&P 500 companies was marginal, and the next two quarters may bring more of the same. In addition, growth internationally has been challenging, particularly in Europe and Japan, while geopolitical risk remains heightened (Iran).

    MARKET LEADERSHIP

    We don’t particularly like the stock market’s reliance on monetary policy support from the Fed, but that’s the market environment we are in right now. Beyond that, sector leadership has been somewhat disconcerting. We would consider this bull market’s foundation to be stronger if it were being driven by more convincing leadership from the cyclical sectors. While cyclical sectors mostly outpaced defensives in the first half, it wasn’t convincing. And the defensive sectors (consumer staples, healthcare, real estate, and utilities) have each outperformed the S&P 500 over the past year [Figure 1] even as the broad stock market benchmark gained 9% during that same period (through July 2, 2019).

    Gold, which has benefited from the Fed’s U-turn and also exhibits defensive characteristics, has also outperformed the S&P 500 during this time, based on the Bloomberg Gold Subindex. At the same time, the more defensive large caps have beaten small caps, based on the Russell indexes; and transports, often viewed as a barometer of economic activity, underperformed, based on the S&P 500 Transports Index.

    We continue to favor cyclical sectors and expect performance to improve in the second half. Technology has been a bright spot all year, and financials led during the second quarter. However, we would like to see more consistent leadership from these groups as a sign of this bull market’s health.

    HISTORICAL PERSPECTIVE

    After such an impressive start and now that it’s four months past the bull market’s tenth birthday, how much is left in the tank? In the 1990s, strong starts to the year (15% or larger gains) in 1995, 1997, and 1998 were followed by additional strength as one of the strongest bull markets in history lasted 10 years.

    However, when we look back further in time to 1983, 1986, and the infamous 1987, we see that strong starts were followed by weakness [Figure 2]. The sample size is small, but an average or median second-half gain of roughly 3% in these nine cases wasn’t too bad, and stocks rose more than they fell.

    The average pullbacks were larger in these instances, with the 1987 Black Monday crash providing a dramatic example. In a typical year, the maximum S&P 500 pullback during the second half has been about 10%. In the nine strong starts listed in the chart, the average pullback was 21% (again, skewed by 1987). Taking out 1987, the median calculation results in an average annual pullback of 9%, similar to the average across all years. This analysis suggests that this second half may not be too different from most years.

    Also consider that if we lower the threshold for a strong first half to 10% or greater gains, then the average second-half advance is actually over 7%, and stocks have added to first-half gains in the second half 80% of the time.

    CONCLUSION

    We maintained our year-end fair value estimate on the S&P 500 of 3,000 in our Midyear Outlook 2019 publication. After getting within a whisker of that target on July 3, we acknowledge that this forecast could be interpreted as negative and a reason to sell stocks. While we constantly review our market forecasts and might raise this one at some point, we would emphasize that stocks, or even bonds for that matter, frequently trade above what we would deem as a fair value range for an extended period of time. We are sticking with our market weight equities recommendation and continue to look for opportunities to add on weakness rather than selling into strength. At the same time, should
    stocks move significantly above our fair value estimate, we may reconsider.

    The second half of the year could be a bit bumpy given risks around trade, geopolitics, and reliance on central bank policies. History tells us pullbacks of 5–10% are quite common, while corrections of 10% or more are not rare by any means. We encourage suitable investors who may be under-invested to use volatility to their advantage to rebalance portfolios.

     

    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.

    Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.

    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.

    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.

    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.

    Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. 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 was prepared by LPL Financial, LLC.

    Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

    Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity. If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

    Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

    Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

    Tracking #1-870200

    The post Taking Stock At The Halfway Mark | Weekly Market Commentary | July 8, 2019 appeared first on Meridian Financial Group.

    ]]> https://mfg-nw.net/taking-stock-at-the-halfway-mark-weekly-market-commentary-july-8-2019/feed/ 0 Job Market Stands Strong | Weekly Economic Commentary | July 8, 2019 https://mfg-nw.net/job-market-stands-strong-weekly-economic-commentary-july-8-2019/ https://mfg-nw.net/job-market-stands-strong-weekly-economic-commentary-july-8-2019/#respond Tue, 09 Jul 2019 01:45:01 +0000 https://mfg-nw.net/job-market-stands-strong-weekly-economic-commentary-july-8-2019/ The June jobs report was solid. Labor market conditions rebounded last month from a disappointing May, easing market worries about the impact of trade tensions on corporate hiring...

    The post Job Market Stands Strong | Weekly Economic Commentary | July 8, 2019 appeared first on Meridian Financial Group.

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    KEY TAKEAWAYS
    • The June jobs report was unexpectedly strong, especially after a disappointing May
    • Labor market strength could buoy otherwise moderate economic prospects.
    • However, the resilient job market could complicate the Fed’s policy debate.

    Click here to download a PDF of this report.

    The June jobs report was solid. Labor market conditions rebounded last month from a disappointing May, easing market worries about the impact of trade tensions on corporate hiring. Nonfarm payrolls rose 224,000 in June, beating consensus estimates for a 160,000 gain [Figure 1].

    The stronger-than-expected data caught investors off guard, though. The 10-year Treasury yield posted its second-biggest increase on a jobs report day since the beginning of 2016, and the S&P 500 Index briefly sold off as much as 1% intraday before ending the day unchanged. Markets were clearly prepped for a second month of disappointing jobs data, but there wasn’t much to critique in June’s report. Good economic news was bad news for risk assets.

    ECONOMIC ENGINE

    The jobs market plays a pivotal role in the U.S. economy and is the engine for consumer activity, which accounts for about 70% of economic output. It’s also the primary focus for Federal Reserve (Fed) policymakers, whose dual mandate is to ensure maximum employment and stable inflation.

    Fortunately, the labor market has been nearly infallible in this economic cycle. U.S. companies have added jobs for 105 straight months, by far the longest streak on record. In June, the 12-month average payroll change was 192,000, a pace slightly above the expansion average of 175,000. Strong labor market conditions have buoyed the expansion for 10 years, and continuing strength could overpower late-cycle cracks in smaller parts of the economy. We also see several encouraging signs in other labor market data: a historically low unemployment rate, contained jobless claims, and solid (but manageable) wage growth.

    To be fair, it has been tough to read the tea leaves in payrolls data recently, given the unusual volatility in data this year. Two of the six payroll reports this year have shown job gains less than 100,000, a level that has been breached only four other times since the end of 2013. Still, there have been some equally unusual strong payroll prints this year, including a blowout 312,000 gain in January.

    POLICY IMPLICATIONS

    Lately though, the job market’s resiliency has muddied the case for looser monetary policy. The U.S. China trade dispute has dragged on for more than a year without much progress, and trade uncertainty has weighed on pockets of the economy for several months. Now, financial markets have priced in multiple Fed rate cuts through the end of 2019, signaling a need for more than just a minor course correction in policy. The hopes for lower rates have boosted U.S. stocks to new records and pushed the 10-year yield to a 2.5-year low, plunging parts of the yield curve into inversion territory (long-term rates falling below short-term rates).

    A month ago, May’s jobs report was unexpectedly weak on multiple fronts, convincing investors that trade tensions had finally infiltrated corporate hiring.

    However, June’s strong jobs report showed that May’s weakness was likely an aberration instead of a trend and weakened the argument for a near-term rate cut. Even though sound labor market data point to an optimistic economic outlook, it could complicate Fed policymakers’ debate over the future of policy. Right now, we think a Fed course correction is appropriate, as monetary policy appears to be too tight given the drawn-out U.S.-China trade dispute. The Fed set the stage for a rate cut at its June meeting, so we think a rate cut could happen as soon as this month. It’s tough to predict what path the Fed will take beyond that initial rate cut, especially while trade uncertainty still lingers. We see low odds of a near-term recession, but the macroeconomic environment is still complicated, and trade tensions have proven to be a powerful weight on economic activity.

    CONCLUSION

    Overall, we remain encouraged by the U.S. job market’s resiliency amid trade tensions. We still think the current pace of job creation is healthy, especially 10 years into an economic expansion. We would also expect to see some slowing in payrolls as the cycle matures, so slight moderation in job growth wouldn’t be alarming to us.

    The macroeconomic environment has been increasingly challenging to read, and anticipating the Fed’s response has been key for financial markets. Right now, we’re watching for clues from Fed officials on where policy could be heading beyond an initial rate cut. To us, there isn’t a clear argument for anything more than a rate cut (maybe two) over the next several months. We’ll get more context from a key policymaker this week, as Fed Chair Jerome Powell is scheduled to deliver testimony before Congress July 10 and 11, with the detailed minutes from the June policy meeting released the same day.

     

    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.

    Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

    Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity. If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

    Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

    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 #1-870149

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    Longest Economic Expansion Ever | Client Letter | July 3, 2019 https://mfg-nw.net/longest-economic-expansion-ever-client-letter-july-3-2019/ https://mfg-nw.net/longest-economic-expansion-ever-client-letter-july-3-2019/#respond Fri, 05 Jul 2019 01:38:22 +0000 https://mfg-nw.net/longest-economic-expansion-ever-client-letter-july-3-2019/ Happy Birthday, United States of America! As we celebrate our nation’s birthday, U.S. leadership on the world stage remains in focus...

    The post Longest Economic Expansion Ever | Client Letter | July 3, 2019 appeared first on Meridian Financial Group.

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    Happy Birthday, United States of America! As we celebrate our nation’s birthday, U.S. leadership on the world stage remains in focus. We received good news on the global trade front from the recent G20 Summit in Japan. President Trump and China’s President Xi agreed to a trade truce, clearing the way for the two nations to resume negotiations — and helping the stock market add to its impressive first half of 2019. In signs of thawing tensions, the next round of U.S. tariffs have been suspended indefinitely, and U.S. companies were cleared to sell certain products to Chinese telecom giant Huawei.

    At the same time, we have no indications that the sticking points that caused talks to derail in May are any closer to being resolved, and existing tariffs remain in place. We still think a broader agreement can be reached this year — hopefully by the fall — but we may have to endure more economic upheaval until that occurs.

    Closer to home, the Federal Reserve (Fed) has sent signals that it may cut the fed funds rate by .25% in July, thereby reversing its December 2018 rate hike. We see a potential rate cut as insurance against further slowing of the economy, and we still believe the odds of near-term recession remain low.

    We also appreciate the Fed’s willingness to adjust its policy in ways that may help prolong the current economic expansion, which at 121 months is now the longest ever recorded. Despite its record-setting length, we think this cycle has more room to run given its gradual growth trajectory in the United States and the lack of excesses building up since the 2007 – 2008 financial crisis. Fiscal stimulus put in place over the past two years by the Tax Cuts and Jobs Act of 2017 also helps.

    Second quarter ended June 30, and earnings season, when most publicly traded companies release their quarterly earnings reports, is fast approaching. We believe the favorable fundamental backdrop for the U.S. economy may provide support for further corporate earnings growth in the second half of this year and into 2020. We also expect better than expected earnings to help drive stock market gains in the second half of 2019, although the pace of earnings growth may be modest as we continue to deal with tariffs and trade uncertainty.

    We believe underlying economic fundamentals, along with a supportive Fed and progress on global trade, will enable the U.S. economy to continue to grow steadily through the end of 2019 and beyond. However, as we noted in our recently published LPL Research Midyear Outlook 2019: Fundamental: How to Focus on What Really Matters in the Markets, we may have to tolerate more market volatility while trade details are ironed out, and some pullbacks in the markets should be expected. We encourage all investors to be prepared to weather some volatility and for suitable investors to use it as an opportunity to rebalance portfolios to align with long-term objections.

    We encourage you to contact your financial advisor with questions, and we wish you a happy Fourth of July.

    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.

    Economic forecasts set forth may not develop as predicted. All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

    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. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

    Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

    All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

    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.

    Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

    If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

    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 # 1-869511 (Exp. 07/20)

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    Stock Fundamentals Still Supportive | Weekly Market Commentary | July 1, 2019 https://mfg-nw.net/stock-fundamentals-still-supportive-weekly-market-commentary-july-1-2019/ https://mfg-nw.net/stock-fundamentals-still-supportive-weekly-market-commentary-july-1-2019/#respond Tue, 02 Jul 2019 14:26:45 +0000 https://mfg-nw.net/stock-fundamentals-still-supportive-weekly-market-commentary-july-1-2019/ We expect stocks to move higher over the second half of the year. Stocks already have had quite a run in 2019, buoyed by a return to fundamentals...

    The post Stock Fundamentals Still Supportive | Weekly Market Commentary | July 1, 2019 appeared first on Meridian Financial Group.

    ]]>
    KEY TAKEAWAYS
    • We believe the economic and earnings environment will support the potential for additional gains for stocks over the second half of 2019.
    • Better than expected earnings may be a positive stock market catalyst while historical patterns forecast the possibility of more strength through year end.
    • We encourage investors to look beyond short-term market stresses and consider the real, fundamental drivers of investment returns.

    Click here to download a PDF of this report.

    We expect stocks to move higher over the second half of the year. Stocks already have had quite a run in 2019, buoyed by a return to fundamentals, with the S&P 500 Index up 17.4% year to date through June 28 for an 18.5% total return. The decision by the Federal Reserve (Fed) to pause rate hikes was the catalyst for the reversal, as market participants no longer feared that the Fed might unnecessarily restrict growth. U.S. economic data also have generally supported a continued economic expansion, while businesses continue to find ways to effectively navigate the environment. Generally upbeat first quarter corporate earnings results gave investors another fundamental reason to bid stocks higher.

    EARNINGS AND VALUATIONS

    The earnings picture changed in May, however, after US.-China trade talks derailed. Due to the increased risk of a prolonged trade war, on June 10 we slightly reduced our S&P 500 earnings per share (EPS) forecast for 2019 from $172.50 to $170, which would represent 5–6% EPS growth if realized. The forecast is still above Wall Street’s consensus of $168, which we suspect is too low considering the mostly positive fundamental environment. Better than expected earnings may be a positive stock market catalyst.

    Valuations remain favorable for U.S. stocks. The S&P 500’s forward 12-month priceto-earnings (P/E) ratio is within historical norms, and P/E ratios relative to interest rates and inflation are both well below long-term averages. Given low rates and inflation, we think a trailing 12-month P/E ratio of 17.5 is appropriate. Combining this with our EPS forecast, we believe at year end the S&P 500 would be fairly valued in the range of 3,000, which is about 2% away from the June 28 close.

    HISTORICAL PERSPECTIVE

    Historical patterns also forecast more strength through the end of the year based on stocks’ strong start. The S&P 500 has historically risen an additional 6% over the rest of the year after a first quarter gain of 10% or more.

    Of course, stocks rarely climb in a linear fashion. We warned of a midyear stock pullback as early as March. Our call wasn’t an indictment of weakening fundamentals, but rather a recognition that a period of renewed volatility was increasingly likely after such a strong rally. Historically, when the S&P 500 has gained 10% or more in the first quarter, stocks have endured an average pullback of about 9% before recovering in the next three quarters.

    Several market risks are still present, including the geopolitical environment, the possibility of failed trade negotiations (even after the progress made over the weekend), and a potential monetary policy mistake. These risks could fuel periodic bouts of volatility, with trade central to our outlook [Figure 1].

    EQUITIES POSITIONING

    In late March, we went to market weight U.S equities, with a slight preference for large caps over small caps based on valuations, an aging business cycle, and expected improvement in the global trade environment. The beneficiaries of fiscal policies largely comprise the value space, but growth has widened its lead since the Fed paused on rate hikes.

    Within equities, active strategies are most likely to benefit from the tailwinds of taxes, regulation, and government spending. To the degree that equity prices are driven by monetary policy and move together, active managers may struggle.

    Despite the length of this expansion, our sector positioning remains cyclical, with overweight recommendations in industrials, financials, and technology. Defensive sectors, including utilities and consumer staples, appear expensive with poor growth outlooks.

    Our concerns about global policies, economies, and interest rates translate into our preference for emerging markets (EM) stocks over international developed-market stocks. Fiscal deficits, populism, and exhausted monetary policies could weigh on sentiment, spending, and investment throughout Europe, while structural reforms and the looming value-added tax (VAT) increase may pressure sentiment in Japan. Population growth, improved flexibility in production, economic momentum, and valuations all favor EM [Figure 2].

    CONCLUSION

    We believe the economic and earnings environment will support additional gains for stocks over the second half of 2019. Steady, albeit slower, economic growth, modest inflationary pressures, our forecast for better than expected corporate profits, reasonable valuations, and our continued belief that U.S.-China trade relations will improve later this year all underpin our positive view of stocks despite such strong gains year to date and lingering risks. The progress made by President Trump and Chinese President Xi at the G20 summit in Japan over the weekend is encouraging but much more work remains.

    We are still navigating a challenging environment. Investing comes with uncertainty, and market volatility can be alarming, but we continue to encourage investors to look beyond short-term market stresses and consider the real drivers of investment returns. Our Midyear Outlook 2019 provides our updated views of current fundamentals that we believe can help provide perspective on what really matters in the markets and enable investors to better pursue their long-term financial goals.

     

    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.

    Our recommendations are subject to change at any time based on market and other conditions. Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.

    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.

    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.

    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.

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

    DEFINITIONS

    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.

    Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

    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.

    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 was prepared by LPL Financial, LLC.

    Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

    Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

    If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

    Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

    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 #1-868389

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    Moderate Growth Ahead | Weekly Economic Commentary | July 1, 2019 https://mfg-nw.net/moderate-growth-ahead-weekly-economic-commentary-july-1-2019/ https://mfg-nw.net/moderate-growth-ahead-weekly-economic-commentary-july-1-2019/#respond Tue, 02 Jul 2019 13:40:36 +0000 https://mfg-nw.net/moderate-growth-ahead-weekly-economic-commentary-july-1-2019/ The U.S. economy grew at 3.1% in the first quarter as domestic demand held up well in the face of a government shutdown and trade headwinds...

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    KEY TAKEAWAYS
    • Fundamentals continue to support steady but moderate economic growth.
    • Even if growth slows, the U.S. job market continues to be a bright spot.
    • Productivity growth is the key to sustaining a virtuous cycle.
    • Progress on trade is central to our growth projections.

    Click here to download a PDF of this report.

    Fundamentals continue to support steady but moderate economic growth in 2019. That said, progress on trade is central to our growth projections, so we’ve slightly reduced our gross domestic product (GDP) forecast to 2.25–2.5%. Here we share our domestic and global economic growth outlooks for the second half of this year, featuring content from our just-released Midyear Outlook 2019.

    U.S. ECONOMY

    The U.S. economy grew at 3.1% in the first quarter as domestic demand held up well in the face of a government shutdown and trade headwinds. Consumer spending was a modest contributor to GDP, while business investment slowed but still posted growth. Data have weakened some in the second quarter but bright spots remain, including a healthy job market.

    With the Fed on hold and fiscal stimulus in place, we believe fundamentals are supportive of continued moderate GDP growth this year. We believe fiscal stimulus from the Tax Cuts and Jobs Act of 2017, along with decreased regulation and increased government spending, will continue to support the U.S. economy in 2019, and that the potential impact is both larger and more durable than consensus expectations. However, progress on trade remains central to our growth projections, and continued uncertainty, despite recent positive news of resumed U.S.-China negotiations following the meeting between President Trump and China’s President Xi at the G-20 summit in Japan, has led us to slightly reduce our 2019 GDP forecast compared to our outlook at the end of 2018 [Figure 1].

    INFLATION

    We believe this pace of growth is consistent with an economy that is able to generate solid demand without creating excessive inflationary pressure—a situation that benefits investors while giving the Fed added flexibility. Year-over-year growth in consumer inflation ran just under 2% in the first half of 2019, well contained despite tightening labor markets.

    This disconnect between a tight labor market and inflation has puzzled monetary policymakers, whose goal is to maintain low and stable inflation. We suspect several longer-term trends have kept inflation at bay, including globalization, retiring baby boomers, and a strong U.S. dollar.

    Wages and wholesale prices continue to grow at a healthy clip, showing us that pricing pressures are building underneath the surface. Based on these building pressures, we expect the core Consumer Price Index (CPI), which excludes food and energy prices, to grow 2–2.25% year over year in 2019. At that pace, consumer inflation would grow roughly at the same rate as it did in 2018.

    JOBS AND PRODUCTIVITY

    Even if growth slows, the U.S. job market continues to be a bright spot. Hiring has continued at an above-average pace for the expansion, and weekly claims for unemployment benefits have dropped to cycle lows several times this year. Strong job growth leads to higher incomes, stronger business and consumer spending, and improved corporate profitability. Productivity growth, though, is the key to sustaining this virtuous cycle. We saw a glimpse of this in the first quarter, as productivity grew at the strongest pace since 2010 [Figure 2].

    Higher productivity becomes the primary driver of economic growth for an economy near full employment, and it lifts profit margins by boosting output and lowering labor costs. Trade uncertainty is becoming an increasing risk to productivity supporting business investment, countering a boost from pro-growth deregulation and tax relief. If trade uncertainty or a failed negotiation dampens business investment, strong productivity growth may be difficult to sustain. If U.S.-China trade talks stall further or fail, we estimate the hit to confidence and business investment could subtract 0.5–0.75% from U.S. GDP growth over the next year. On the other hand, trade clarity could motivate businesses to resume expansion plans and capital investment.

    GLOBAL ECONOMY

    Even if revised downward, U.S. growth expectations have been holding up relatively well compared with global growth prospects. While trade-related tensions have had some impact on global growth, we believe the repercussions have been small to date and that structural issues abroad have been the main culprit in the global slowdown.

    Europe in particular still faces a variety of political and economic challenges. The United Kingdom’s Brexit process, messy from the start, continues to unravel; France is contending with the “yellow vest” protests; Germany is battling weaker manufacturing; and Italy is struggling with the difficult budget negotiations of an unsettled governing coalition. Trade concerns also remain in play for Europe, with important trade discussions with the United States on agriculture and autos still outstanding.

    These structural issues have also impacted the monetary policy outlook, with the European Central Bank (ECB) pushing back plans to raise rates and reduce the size of the ECB’s balance sheet. In fact, speculation of an ECB rate cut and another round of quantitative easing ramped up last week after comments from ECB President Mario Draghi.

    In Japan, programs to increase government spending and reduce rates have supported growth. However, true structural reforms remain elusive. Consumer sentiment has also weakened ahead of the value-added tax (VAT) increase scheduled for the fourth quarter of 2019. Though Japan’s recent GDP growth has exceeded expectations, we suspect higher activity comes at the expense of growth in subsequent quarters.

    We still expect emerging markets (EM) to set the pace for global GDP. Beijing’s intervention has stabilized demand in China, but trade uncertainty continues to weigh on confidence and investment, suggesting the possibility for further stimulus. These policy efforts should support export growth in the rest of emerging Asia. In India, we still expect GDP growth to outpace the rest of EM over the next few years, even as stimulus wanes following the Indian elections. Growth in emerging Europe remains weak, indicating the need for central bank accommodation in Turkey and Russia. We expect Mexico to continue to lead growth in Latin America, as Brazil struggles to gain traction.

    We still see the United States as a growth leader in the developed world, but emerging markets continue to play an increasing role in the global economy, with the pace of growth leadership shifting from China to India.

    CONCLUSION

    At the halfway point of 2019, the U.S. economy has held steady, supported by fiscal stimulus, and corporate profits continue to grow. At the same time, trade tensions are increasingly weighing on the economic outlook, although recent progress at the G-20 meeting in Japan was encouraging, while slowing global growth and political uncertainty have forced global central bankers to extend extraordinary levels of support. We will continue to monitor the impact of trade developments on the indicators we watch. For now, the odds of a near-term recession appear to remain low.

     

    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.

    Our recommendations are subject to change at any time based on market and other conditions. Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.

    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.

    DEFINITIONS

    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.

    Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

    Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

    If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.

    Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

    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 #1-868405 (Exp. 07/20)

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