Meridian Financial Group https://mfg-nw.net Thu, 12 Sep 2019 11:07:46 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.3 https://mfg-nw.net/wp-content/uploads/sites/37/2019/03/cropped-logoformeridian11-32x32.jpg Meridian Financial Group https://mfg-nw.net 32 32 Market Insight Monthly | August 2019 https://mfg-nw.net/market-insight-monthly-august-2019/ https://mfg-nw.net/market-insight-monthly-august-2019/#respond Thu, 12 Sep 2019 10:31:39 +0000 https://mfg-nw.net/market-insight-monthly-august-2019/ U.S. economic data was mixed in August, reflecting the complicated macroeconomic environment in the midst of high trade uncertainty...

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ECONOMY: MIXED U.S. ECONOMIC DATA IN AUGUST

U.S. economic data was mixed in August, reflecting the complicated macroeconomic environment in the midst of high trade uncertainty.

The Conference Board’s Leading Economic Index (LEI) rose 0.5% month over month in July, the biggest gain since September 2018. The LEI rose 1.6% year over year, signaling future economic growth [Figure 1].

Gross domestic product (GDP) growth was revised to 2% for the second quarter, down from the 2.1% initially reported in July. Consumer spending added 3.1 percentage points to overall growth, while trade and inventories were a 1.6 percentage point drag. Business spending was still a slight drag on growth, according to the revised data.

The July jobs report, released in early August, showed nonfarm payrolls rose in line with consensus expectations. The 12- month average pace of payroll gains was slightly above the expansion average, evidence that companies are still hiring at a solid pace.

The pace of consumer inflation picked up in July. The core Consumer Price Index (CPI), which excludes food and energy prices, rose 2.2% year over year, its fastest pace of growth in six months [Figure 2].

Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in July, below policymakers’ 2% target.

Wholesale price growth has waned in recent months, which could point to weaker inflationary pressures again. The core Producer Price Index (PPI), which excludes food and energy prices, grew 2.2% year over year, its slowest pace in 15 months.

Average hourly earnings rose 3.2% year over year in July. Wage growth has moderated in recent months, but it has remained at a level that should continue to support consumer spending without concerns of overheating.

U.S. manufacturing deteriorated further, caving to a global trend of weakness in the sector. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to 51.2, matching its lowest point since August 2016. Preliminary Markit PMI data for August showed the manufacturing sector fell into contractionary territory for the first time since 2009.

Data on the U.S. consumer was solid. The Conference Board’s Consumer Confidence Index posted its fifth highest reading of the economic cycle in August. Retail sales climbed for a fifth straight month in July.

Still, business spending floundered amid trade tensions. Orders for nondefense capital goods (excluding aircraft) ground to a halt in July, rising just 0.4% for the third straight month of less than 1% growth.

Fed Minutes and Jackson Hole

Central banks around the world took a summer break in August. None of the major banks met in August, but the Fed, European Central Bank, and Bank of Japan all have meetings scheduled in September.

Investors did get a taste of Fed commentary during August, though. Minutes from the Fed’s July meeting, released August 21, showed the complexity of policymakers’ discussions leading up to the July rate cut. The minutes reinforced Fed Chair Jerome Powell’s description of the rate cut as a “mid-cycle adjustment.”

On August 23, Powell gave a closely watched speech at the annual gathering of central bankers in Jackson Hole, WY. Powell said the economy “continued to perform well overall,” but he highlighted increasing risks from a deteriorating global economy and uncertainty around trade, the same risks that induced the Fed to cut rates in July. While he didn’t lay out a clear policy path, Powell pledged that the Fed would “act as appropriate to sustain the expansion,” potentially laying the
groundwork for an additional rate cut when the Fed meets next.

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 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- 892397 (Exp. 09/20)

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Corporate Earnings Outlook | Weekly Market Commentary | September 9, 2019 https://mfg-nw.net/corporate-earnings-outlook-weekly-market-commentary-september-9-2019/ https://mfg-nw.net/corporate-earnings-outlook-weekly-market-commentary-september-9-2019/#respond Tue, 10 Sep 2019 13:01:50 +0000 https://mfg-nw.net/corporate-earnings-outlook-weekly-market-commentary-september-9-2019/ We lowered our 2019 earnings growth forecast for the S&P 500 Index on August 19 due to increased risk to economic growth and corporate profits from the ongoing trade conflict...

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We lowered our 2019 earnings growth forecast for the S&P 500 Index on August 19 due to increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. Until we get clarity on trade, we believe earnings will likely continue to grow but only modestly [Figure 1].

We recently lowered our 2019 S&P 500 Index earnings growth forecast. In our August 19 Weekly Market Commentary, “Tweaking Forecasts,” we lowered our 2019 expectations for growth domestic product (GDP), the 10-year Treasury yield, and S&P 500 earnings per share (EPS). Our revised S&P 500 EPS forecast is now $165 for 2019, and we initiated a 2020 forecast of $175. Importantly, we have maintained our year end fair value target on the S&P 500 of 3,000, as we expect lower interest rates and inflation to support higher valuations. Here we provide more background on our reduced earnings outlook.

BACKGROUND

We lowered our 2019 S&P 500 EPS forecast last month, from $170 to $165, due to the impact of tariffs,
lower business investment, and trade uncertainty. The revised figure, which is in line with consensus
estimates (source: FactSet), represents 2-3% growth compared with 2018. We had been above consensus
before tariffs offset much of the benefits of fiscal stimulus. Earnings upside from a surprise trade agreement has become increasingly unlikely after the latest escalation, although we are encouraged by China’s willingness to meet face-to-face in early October.

The trade conflict is weighing on earnings in several ways. Slower economic growth hampers revenue, while paying tariffs and dealing with supply chain disruptions hurt profit margins. In addition, business uncertainty around future trade actions weighs on capital investments, which limits opportunities for companies to grow revenue, particularly industrial and technology companies, and caps gains in productivity (output per hour worked) that could boost profit margins (more output per hour means companies can do more with fewer resources and contain wage increases). On top of that, slower growth in international developed economies has added to near-term pressure on the U.S. economy and therefore on companies’ revenue.

PRELIMINARY 2020 FORECASTS

In August we also initiated preliminary S&P 500 EPS forecasts for 2020 of $175. At this point, we expect modest 1.75% GDP growth, 2–2.25% on the 10-year Treasury yield, $175 in S&P 500 EPS, and a range of 3,150–3,200 for S&P 500 fair value at year-end 2020. Our forecasts for GDP and the 10-year yield are near consensus while our EPS projection is currently $8 below the consensus ($183) estimate (source for consensus estimates is FactSet). These forecasts reflect increasing odds of a prolonged trade conflict and of recession in the latter half of 2020.

TAKEAWAYS FROM SECOND QUARTER EARNINGS SEASON

We would say the most important takeaway from the now-completed second quarter earnings season is that earnings are still growing and an earnings recession appears to be off the table for now. While FactSet’s math said the S&P 500 Index overall produced flat EPS year over year, other sources such as Refinitiv (former Thomson Reuters) reported operating earnings growth of over 3%. Boeing’s multi billion charge during the quarter detracted 1.5% from S&P 500 EPS by itself, which appears to be a unique event that shouldn’t recur.

Overall, we think corporate America has done a good job delivering modest earnings gains amid significant headwinds, including tariffs and trade uncertainty, slowing growth in Europe and Japan, and a strong U.S. dollar. Roughly 40% of S&P 500 profits are generated overseas and are therefore sensitive to global trade, international economies, and foreign exchange markets. Over the past two months, EPS estimates for the next four quarters fell about 2%, in line with historical averages and an impressive feat given the various headwinds.

MAINTAINING S&P 500 FAIR VALUE TARGET

After exceeding our fair value target in July, stocks have struggled with trade uncertainty and recession fears related to the inverted yield curve. Long-term interest rates have dipped below short term rates, historically a leading indicator of recession, though with varied and relatively long lead times. Although we have lowered our earnings forecasts, we believe potential Federal Reserve rate cuts, mild inflation, and lower market interest rates support higher price-to-earnings ratios (P/E) for stocks. We look for a price-to-earnings multiple (P/E) of slightly over 18 on $165 in S&P EPS to get us back to the 3,000 range on the S&P 500 by year-end.

CONCLUSION

We reduced our 2019 S&P 500 EPS forecast in August to reflect increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. Although we continue to expect resolution later this year or in early 2020, the odds of a more prolonged dispute have risen. As a result, we believe it is prudent to be somewhat conservative in our forecasts until we get more clarity on trade.

NEW WEEKLY MARKET PERFORMANCE REPORT

We are pleased to share our new Weekly Market Performance report with insights on major asset classes.

Click here to download a PDF of this report.

 

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 company names noted herein are for educational purposes only and are not an indication of trading intent or a solicitation of their products or services.

LPL Financial doesn’t provide research on individual equities.

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.

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.

The price-to-earnings ratio (P/E 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 P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

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.

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 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.

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 #1-890561 (Exp. 09/20)

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The Dog Days of Summer | Client Letter | September 4, 2019 https://mfg-nw.net/the-dog-days-of-summer-client-letter-september-4-2019/ https://mfg-nw.net/the-dog-days-of-summer-client-letter-september-4-2019/#respond Mon, 09 Sep 2019 03:38:19 +0000 https://mfg-nw.net/the-dog-days-of-summer-client-letter-september-4-2019/ The Dog Days of Summer were on full display this past month, as a variety of concerns pushed stocks and bond yields lower....

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The Dog Days of Summer were on full display this past month, as a variety of concerns pushed stocks and bond yields lower. After reaching new record highs in late July, the S&P 500 Index dropped approximately 1.8% in August as trade concerns pressured investor sentiment around the world. Impacts of U.S. – China trade tensions reverberated throughout the economy and financial markets in recent weeks, including weakening global manufacturing data and plunging sovereign interest rates. As a result, safe-haven assets like gold, government bonds, and utilities outperformed in August

Escalating trade tensions early last month dashed hopes of a quick resolution. Both sides need to show strength as China is dealing with protests in Hong Kong and preparing for the 70th anniversary of the People’s Republic of China this October, while President Trump is gearing up for the U.S. presidential election. While global manufacturing has borne the brunt of the trade damage, the latest round of tariffs will impact more consumer goods.

Fortunately, the U.S. consumer remains in good shape, bolstering the economy. The unemployment rate is low, wages are rising, and debt as a percentage of disposable income remains near four-decade lows. Personal spending has driven U.S. output, which during the first half of 2019 remained slightly above the average for the economic expansion. We believe the key to sustaining growth is renewed strength in business investment, which likely requires progress on trade.

The inverted U.S. Treasury yield curve reflects these uncertainties. An inversion occurs when short term interest rates exceed longer-term rates and typically indicates pending economic weakness, or recession. Considering the relative strength of the U.S. economy and expected interest rate cuts from the Federal Reserve (Fed), we’re not convinced recession is imminent. Instead, we believe the shape of the yield curve reflects a run on U.S. Treasuries based on the global search for yield. More than $17 trillion in global sovereign debt offers negative yields, where lenders pay borrowers for the “privilege” of loaning them money.

Another message sent by the yield curve is that monetary policy is too tight given trade uncertainty, so the Fed needs to respond promptly with lower interest rates. Of course, we will have a recession someday, and now that we’re in the longest expansion ever, anticipation is high. Yet reviewing fundamentals, even with trade, we’re hard pressed to project contraction soon. It is conceivable, though, that a variety of global events, including the uncertainty of trade and the U.S. election, may cause businesses and consumers to “sit this one out” in the fourth quarter of 2020 and the first quarter of 2021. We assign odds of that recessionary scenario at 1 in 3.

In conclusion, fundamentals of the U.S. economy remain solid even as trade uncertainty weighs on investor sentiment. We would interpret the yield curve inversion as a signal that the Fed is too tight, not of imminent recession. Also keep in mind that stocks have historically performed well in the 12 to 18 months following inversions. We recommend suitable investors continue to focus on economic and market fundamentals while maintaining diversified portfolios. If you have any questions, please contact your trusted financial advisor.

 

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 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.

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.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They 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.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The gold market is subject to speculation and volatility as are other markets.

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.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

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.

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 #1-819896 (Exp. 09/20)

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U.S. Treasuries and the Yield Curve | Weekly Market Commentary | September 3, 2019 https://mfg-nw.net/u-s-treasuries-and-the-yield-curve-weekly-market-commentary-september-3-2019/ https://mfg-nw.net/u-s-treasuries-and-the-yield-curve-weekly-market-commentary-september-3-2019/#respond Wed, 04 Sep 2019 04:25:21 +0000 https://mfg-nw.net/u-s-treasuries-and-the-yield-curve-weekly-market-commentary-september-3-2019/ We recently reduced our year-end forecast range for the 10-year U.S. Treasury yield from 2.5–2.75% to 1.75–2%...

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We recently reduced our year-end forecast range for the 10-year U.S. Treasury yield from 2.5–2.75% to 1.75–2%. This significant reduction reflects what we consider the many somewhat curious aspects of the domestic and global macroeconomic environments. Trade uncertainty, low inflation, geopolitical risks, monetary policy, and relative valuation all played a role in our decision. To be sure, delayed prospects for a U.S.-China trade agreement remain central to our economic and market projections in the coming months.

We expect the combination of a softer economic growth outlook with mild U.S. inflationary pressures and ultralow yields internationally to potentially translate into lower domestic yields. The uncertain U.S.-China trade situation has weighed heavily on business investment, resulting in weaker manufacturing activity worldwide. It is also important to note that trade challenges exist beyond the United States and China. The United States’ pacts regarding NAFTA 2.0, South Korea and Japan, and European automobiles are still unresolved. Despite a decade’s worth of global monetary policy accommodation, very few inflationary pressures are evident, presenting leading central banks with the need for further accommodation.

THE FED’S ROLE

In recent communications from the Federal Reserve (Fed), including minutes from the July meeting and Fed Chair Jerome Powell’s recent speech in Jackson Hole, WY, the central bank has emphasized its intention to “act as appropriate” in order to “sustain the expansion.” The Fed, which has a history of ambiguity, has been very clear in recent months. Considering the Fed’s official mandate includes ensuring price stability and full employment, another set of factors has arisen in this global environment: interest rate differentials and the impact on currencies.

Global fixed income investors currently have a choice between investing in more than $15 trillion worth of negative-yielding debt or purchasing U.S. Treasuries in the highest rated and most liquid bond market in the world, despite yields hovering near multi-year lows. We believe the relative valuation opportunity of investing in U.S. Treasuries has offset global investors’ concerns about currency hedging costs, resulting in increased buying pressure, particularly in longer-dated securities. In turn, this dynamic has led to yield curve inversion in recent months [Figure 1].

There are forces that could stop yields’ spiral downwards. We believe at least 50 basis points (0.50%) in Fed rate cuts could be enough to quell fear in global investors and lessen the rush into longer dated Treasuries. Over the long term, the U.S. Treasury Department will need to increase the U.S. debt supply to finance an anticipated budget deficit of about $1 trillion. Eventually, investors could demand higher yields to compensate for the extra risk.

YIELD CURVE SIGNALS

We recognize the danger of printing these words, but the current environment is profoundly unique. Typically, economic cycles end as inflation climbs, and the Fed responds by tightening policy, leading short-term rates to increase faster than longer-term rates, inverting the yield curve, and portending recession. The present situation involves falling commodity prices, below-target inflation, an accommodative Fed, and a firm U.S. dollar. A variety of geopolitical risks have pushed “safe haven” investors into Treasuries, despite sound fundamentals and the rising budget deficit. Consequently, the current yield curve inversion is characterized by long-term rates falling faster than short-term rates, increasing investor fears of imminent recession.

In the last three economic expansions, the U.S. economy peaked about a year after the 2-year and 10 year yield spread inverted for 90 days straight. Since the spread between the 10-year Treasury and 2 year Treasury yield has been negative only occasionally over the past few weeks, we suspect the message really is that Fed policy is too tight for current trade uncertainty. A persistent and extended inversion, however, would send a darker message about expected economic activity.

Of course, after a record expansion, we are bound to have recession sometime. Right now, economic fundamentals suggests the consumer remains sound, and any clarity on trade potentially can boost business investment, possibly supporting productivity growth and elongating the expansion.

However, prolonged trade uncertainty and a potentially rancorous U.S. election campaign leads us to wager a one-in-three chance that businesses and consumers decide to “sit this one out” in the fourth quarter of 2020 and the first quarter of 2021.

CONCLUSION

We’ve lowered our 10-year yield forecast to 1.75–2%. We still believe the 10-year yield’s fair value is higher than these levels, but the combination of trade uncertainty, geopolitical risks, and global monetary policy could keep enticing fixed income investors into Treasuries. For fixed income allocations, we continue to emphasize a blend of high-quality intermediate bonds in tactically oriented portfolios. Treasuries look richly valued here, but investment-grade corporate bonds look attractive given U.S. company strength, and mortgage-backed securities could act as a diversification source for yields for suitable investors.

NOTE OF REFERENCE

As we announced in our August 19 Weekly Market Commentary: Tweaking Forecasts, we lowered our 2019 projections for U.S. gross domestic product (GDP), the 10-year U.S. Treasury yield, and S&P 500 Index operating earnings, and introduced preliminary 2020 forecasts. We’re covering these changes in depth over the course of three weeks. Last week, we addressed our reasoning for lowering our U.S. GDP forecast in Weekly Market Commentary: LPL’s U.S. Real GDP Forecast Change, and this week we covered the 10-year yield forecast. Next week, we‘ll highlight our thoughts on corporate profits.

Click here to download a PDF of this report.

 

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.

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. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They 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.

The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

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.

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.

The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

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.

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 #1-888462 (Exp. 09/20)

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LPL’s U.S. Real GDP Forecast Change | Weekly Market Commentary | August 26, 2019 https://mfg-nw.net/lpls-u-s-real-gdp-forecast-change-weekly-market-commentary-august-26-2019/ https://mfg-nw.net/lpls-u-s-real-gdp-forecast-change-weekly-market-commentary-august-26-2019/#respond Tue, 27 Aug 2019 00:44:05 +0000 https://mfg-nw.net/lpls-u-s-real-gdp-forecast-change-weekly-market-commentary-august-26-2019/ We have lowered our projections for U.S. gross domestic product (GDP), the 10-year U.S. Treasury yield, and operating earnings for the S&P 500 Index in 2019...

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We have lowered our projections for U.S. gross domestic product (GDP), the 10-year U.S. Treasury yield, and operating earnings for the S&P 500 Index in 2019, as we noted in the August 19 Weekly Market Commentary: Tweaking Forecasts, and introduced our preliminary 2020 forecasts. Over the next three weeks, we will highlight our reasoning behind these changes. Delayed prospects for a trade agreement between the United States and China remain central to our projections for economic growth and financial market performance in the coming months and quarters.

Tariffs and threats of escalation weigh on business investment. As we emphasized in our Midyear Outlook 2019, business investment remains a critical component in determining the extent to which this record economic expansion can persist. As businesses invest in their futures, productivity growth often results, leading to increased efficiencies and improved output per hour worked. This can help elongate the expansion, as higher productivity limits inflation growth, and the absence of threatening wage gains helps sustain profit margins, supporting equity prices.

Unfortunately, the delayed trade negotiations and increased tariff threats between the United States and China have led businesses to hold back on their capital expenditures. After growing by approximately 7% in the first half of 2018, business investment has grown by only an average of 3.8% over the past year. This is troubling because after a decade of monetary policy support, the 2017 Tax Cuts and Jobs Act provided businesses with a package of fiscal policy incentives to increase investment. The combination of tax rates, repatriation of internationally sourced profits, and immediate expensing provisions were all tailwinds for capital expenditures. Yet it appears these tailwinds have been no match for the headwind of trade uncertainty. Consequently, we reduced our forecast for U.S. real GDP from a range of 2.25%–2.50% to 2% in 2019. Though the U.S. economy may be slowing from last year’s pace, it is still growing [Figure 1].

GDP=C+I+G+X

While some of you may cringe remembering this formula from Economics 101, we believe it still serves as a powerful reminder for the context and components of U.S. economic activity. Consumption (C), investment (I), government spending (G), and net exports (X), or trade, all factor into the calculation for economic output (GDP). While trade has gained all the headlines recently, it’s important to note that net exports account for only approximately 12% of U.S. GDP. The derivative, or add-on effects, of drops in business investment and trade can affect manufacturing, however, which has maintained growth but at a slower rate. Manufacturing may comprise only less than one-fifth of the overall economy, but we would argue that it is responsible for the majority of economic volatility.

Fortunately, the bulwark of the domestic and global economies has been the U.S. consumer. The combination of low unemployment and moderate wage growth has led to strong trends in personal spending, an area that comprises approximately 70% of the economy. Indeed, in the second quarter, personal consumption grew 4.3%, contributing 2.9 percentage points to the overall GDP increase of 2.1%.

Upcoming Challenges, But No Immediate Recession

The consumer can pull only so much weight, however. Even after the recent tariff reprieve, 25% levies remain in place on roughly $290 billion of Chinese goods, and 10% tariffs on an additional $110 billion in goods begin in September. Businesses are absorbing some of these costs while facing uncertainty about future trade actions, including currency. Slower international growth and geopolitical concerns also add to near-term pressure on U.S. output, potentially offsetting renewed monetary policy accommodation. We suspect these trends may persist in the coming quarters, factoring into our preliminary real GDP estimate of 1.75% for 2020.

CONCLUSION

We believe the U.S. economy is in much better shape than the rest of the developed world. After a record expansion, demand may be moderating, but we do not see the fundamental justification for recession anytime soon. Solid consumption, high employment, low interest rates, and inflation all factor into our thought process. We view the flattening/inversion of the U.S. Treasury yield curve as more of a reflection of valuation relative to global sovereign bond rates than an indicator of immediate domestic risk. Yet we have to have recession—someday—and we suspect the likeliest cause may prove to be a confluence of global events, including a rancorous U.S. elections campaign season. Indeed, at the end of 2020 and the beginning of 2021, businesses and consumers may simply decide to “sit this one out” and wait to see what happens with the winning administration.

NEW WEEKLY MARKET PERFORMANCE REPORT

We are pleased to share our new Weekly Market Performance report with insights on major asset classes.

Click here to download a PDF of this report.

 

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.

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

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.

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.

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 #1-886003 (Exp. 08/20)

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Portfolio Compass | August 21, 2019 https://mfg-nw.net/portfolio-compass-august-21-2019/ https://mfg-nw.net/portfolio-compass-august-21-2019/#respond Mon, 26 Aug 2019 03:42:57 +0000 https://mfg-nw.net/portfolio-compass-august-21-2019/ We have maintained our S&P 500 Index year-end fair value target of 3,000 despite our lowered economic and earnings growth forecasts amid trade uncertainty...

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COMPASS CHANGES
  • Upgraded our view of large growth from neutral to neutral/positive
  • Downgraded our view of mid value from neutral/positive to neutral
  • Downgraded our view of small value from neutral to negative/neutral
  • Upgraded our view of consumer discretionary from negative/neutral to neutral
  • Downgraded our view of energy from neutral to negative/neutral
  • Downgraded our view of financials from neutral/positive to neutral
  • Upgraded our view of real estate from neutral to neutral/positive
  • Downgraded our view of short-term municipal bonds from neutral to neutral/negative
  • Upgraded our view of precious metals from neutral to neutral/positive

INVESTMENT TAKEAWAYS

  • We have maintained our S&P 500 Index year-end fair value target of 3,000 despite our lowered economic and earnings growth forecasts amid trade uncertainty.*
  • In light of the pivot by the Federal Reserve, we believe value stocks may have a tougher time keeping up with their growth counterparts. We recommend even growth/value exposure and have shifted sector views accordingly.
  • As the business cycle ages, and the dollar’s uptrend potentially reverses, large caps may sustain market leadership.
  • We expect a U.S.-China trade deal late this year or in early 2020, but the risk of a more prolonged conflict has risen. Still, valuations and economic growth favor emerging markets over developed foreign markets.
  • Slower but still solid economic growth and modest inflation may pressure yields modestly higher, but trade uncertainty and the global appetite for U.S. Treasuries may lower the likelihood of a large upside move.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment grade corporates and mortgage-backed securities (MBS) over Treasuries, in suitable strategies. MBS provides a diversifying source of yield within the investment grade space, while economic growth is supportive of investment-grade corporates. High yield corporates could become an alternative to equities on a risk-adjusted basis.
  • The latest pullback shows the inability of the U.S. market to break out of a large trading range formed over the past two years. While the S&P 500 has been unable to sustain prices above 2,900, we see multiple levels of support that make a retest of the December lows unlikely.

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 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 #1-884940

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Tweaking Our Forecasts | Weekly Market Commentary | August 19, 2019 https://mfg-nw.net/tweaking-our-forecasts-weekly-market-commentary-august-19-2019/ https://mfg-nw.net/tweaking-our-forecasts-weekly-market-commentary-august-19-2019/#respond Mon, 19 Aug 2019 17:09:50 +0000 https://mfg-nw.net/tweaking-our-forecasts-weekly-market-commentary-august-19-2019/ Trade fears swung around stocks last week before some tariffs were delayed August 13 to avoid impacting the holiday shopping season...

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We are tweaking our 2019 forecasts to reflect increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. We are maintaining our year-end fair value target on the S&P 500 of 3,000 as lower interest rates and inflation support higher valuations.

Recession fears from the yield curve inversion offset the boost from the tariff delay. Trade fears swung around stocks last week before some tariffs were delayed August 13 to avoid impacting the holiday shopping season. On August 14, the first inversion of the 2-year/10-year Treasury yield curve since 2007 sparked recession fears, which caused stocks to erase the prior day’s gains. For the week, a variety of factors weighed on sentiment, including trade, slowing global growth, and plunging sovereign bond yields.

While the tariff delay is an encouraging step, and we expect the United States and China to keep talking (talks are scheduled for September), our timetable for a potential agreement has been pushed out. Odds that the dispute drags into 2020 have increased, introducing more risk to economic growth and corporate profits. As a result, we are tweaking our forecasts for gross domestic product (GDP), the 10 year Treasury yield, and S&P 500 Index earnings as follows:

  • U.S. GDP growth: 2%, down from 2.25–2.5%
  • 10-year Treasury yield: 1.75–2%, down from 2.50–2.75%
  • S&P 500 earnings per share (EPS): $165, down from $170

Importantly, we are maintaining our year-end fair value target on the S&P 500 of 3,000 as lower interest rates and inflation support higher valuations.

LOWERING GDP FORECAST TO 2%

We are reducing our 2019 U.S. GDP growth forecast to 2%, down from our prior forecast of 2.25–2.5%. Even after last week’s tariff reprieve on roughly $270 billion in Chinese goods, 25% tariffs remain in place on around $200 billion of Chinese goods, and 10% tariffs on an additional $100 billion or so in goods are scheduled for September 1. Businesses are absorbing some of these costs while facing uncertainty about future trade actions, which may continue to weigh on capital investment decisions. Slower international growth adds to near-term pressure on U.S. growth, which could offset the impacts of fiscal stimulus and accommodative monetary policy.

Although the yield curve has sparked recession fears (discussed in our Takeaways on the Yield Curve Inversion blog), we do not interpret this latest inversion of the 2-year/10-year Treasury yield spread as a sign of imminent recession. We believe the yield curve’s shape has been driven more by technical factors and relative valuations than domestic economic weakness, as Treasury yields have been weighed down by intense global demand amid negative sovereign debt yields internationally. The U.S. economy remains in good shape with full employment and rising wages fueling strong consumer activity. We take comfort in the fact that stocks historically have done well after 2-year/10-year inversions, with an average one-year gain of 14% for the S&P 500 following inversions [Figure 1].

LOWERING 10-YEAR TREASURY YIELD FORECAST

We are lowering our year-end forecast for the 10-year Treasury yield to 1.75–2%, down from 2.50–2.75%. We expect a softer economic growth outlook with mild inflationary pressures in the United States and record-low yields internationally to translate into lower domestic yields.

CORPORATE PROFITS

We are lowering our 2019 S&P 500 EPS forecast for 2019 from $170 to $165 due to the impact of tariffs, lower business investment, and trade uncertainty. Slower growth hampers revenue, while tariffs, supply chain disruptions, and business uncertainty introduce near-term risk to profits. Upside from a surprise trade agreement appears to becoming increasingly unlikely. Note that our revised forecast matches consensus for this year (Source: FactSet).

MAINTAINING S&P 500 FAIR VALUE TARGET

After exceeding our fair value target of 3,000 a few weeks ago, stocks have struggled with concerns about trade’s impact on the global economy. Although we have lowered our earnings forecasts, we believe potential Federal Reserve rate cuts, mild inflation, and lower market interest rates support higher price-to-earnings ratios (P/E) for stocks. We look for a P/E of slightly over 18 on $165 in S&P EPS to get us back to the 3,000 range by year-end.

INTRODUCING PRELIMINARY 2020 FORECASTS

We are also introducing preliminary forecasts for 2020. At this point, we expect 1.75% GDP growth, 2 2.25% on the 10-year Treasury yield, $175 in S&P 500 EPS, and a range of 3,150–3,200 for S&P 500 fair value at year-end 2020. Our forecasts for GDP and the 10-year yield are near consensus while our EPS projection is currently $8 below the consensus ($183) estimate. These forecasts reflect increasing odds of a prolonged trade conflict and increased odds of recession in the latter half of 2020.

CONCLUSION

We are tweaking our 2019 forecasts to reflect increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. Although we continue to expect resolution later this year or in early 2020, the odds of a more prolonged dispute have risen. As a result, we think it is prudent to slightly reduce our forecasts for economic growth, interest rates, and corporate profits. Look for more on our revised forecasts in upcoming weekly publications and blogs.

NEW WEEKLY MARKET PERFORMANCE REPORT

We are pleased to share our new Weekly Market Performance report with insights on major asset classes.

Click here to download a PDF of this report.

 

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 and are subject to change at any time based on market and other conditions. .

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.

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.

The price-to-earnings ratio (P/E 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 P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

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.

Treasuries are a marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments (Yield) semi-annually.

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.

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 # 1-883754 (Exp. 08/20)

The post Tweaking Our Forecasts | Weekly Market Commentary | August 19, 2019 appeared first on Meridian Financial Group.

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The New (Ab)normal | Weekly Market Commentary | August 12, 2019 https://mfg-nw.net/the-new-abnormal-weekly-market-commentary-august-12-2019/ https://mfg-nw.net/the-new-abnormal-weekly-market-commentary-august-12-2019/#respond Wed, 14 Aug 2019 05:21:56 +0000 https://mfg-nw.net/the-new-abnormal-weekly-market-commentary-august-12-2019/ Stocks endured significant volatility last week but showed some resilience Wednesday, August 7, when the S&P 500 Index dropped as much as 2% intraday before rallying back...

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Stocks endured significant volatility last week but showed some resilience Wednesday, August 7, when the S&P 500 Index dropped as much as 2% intraday before rallying back late to close slightly positive. Stocks ended the week near flat, putting the S&P 500 about 3% away from its record high.

TRADE NEWS

Escalating trade tensions drove the volatility. In response to President Trump’s latest tariff threat, the Chinese central bank allowed its currency (the yuan) to weaken below the psychologically important 7 per dollar level considered a line in the sand.

Unfortunately, both sides may inflict more pain on each other before we see progress. China has other ways to retaliate besides its currency, as does the United States. (A weaker currency helps make Chinese exports cheaper and helps offset the impact of tariffs). We listed several possible retaliatory actions in our August 7 blog, Is a Trade Deal Still Possible?. China’s reluctance to make structural changes to its markets, U.S. restrictions on Chinese telecom giant Huawei, and President Trump’s refusal to remove tariffs remain key sticking points.

While it may take time to re-establish trust to pave the way for progress, we expect self-interest to bring the two sides back to the negotiating table before long. Keep in mind the 2020 campaign season is approaching, and economic uncertainty and stock market losses possibly could hurt President Trump’s re election chances.

VOLATILITY PERSPECTIVE

Last week’s stock market volatility was a bit jarring after a period of relative calm and a series of new highs. It’s important to keep in mind the S&P 500 spent much of June below where it is now. Also recall that LPL Research made the decision to go to market weight equities in late March 2019 when the S&P 500 was near 2,850. With fundamentals little changed, we don’t see any reason to get more negative on equities if we were to return to that level or even lower.

Also keep in mind that even in positive years, the average peak-to-trough decline in the S&P 500 has been 11% (based on data back to 1950) [Figure 1]. The biggest drawdown year to date has been 7%, based on closing prices. Volatility this year has been below average thus far. Pullbacks of 5–9% are common we get three per year on average. We would view these downdrafts as opportunities for suitable investors to rebalance or potentially add to equity positions if appropriate.

THE FED IS OUR FRIEND

The Federal Reserve (Fed) is clearly the market’s friend right now. Rate cuts often come in bunches, and we are likely to get one or possibly two more cuts by year-end, in addition to the one on July 31. Historically, initial rate cuts in economic expansions have preceded strong stock market performance. In fact, the last five initial rate cuts by the Fed (back to 1984) in expansions were followed by the S&P 500 gaining an average of 16% over the next 12 months. If stocks are going to return to recent highs, Fed support will be part of the story.

KEY TECHNICAL LEVELS TO WATCH

If stocks extend losses, we would expect the S&P 500 to garner support from its 200-day moving average at around 2,790, which is about 5% below the current price. Stocks are well above the June 3, 2019, lows on the index (2,744), which is still short of the 10% correction threshold. If stocks rally from = the current level, the S&P 500 may encounter resistance at its 50-day moving average at around 2,930.

CONCLUSION

We believe the fundamentals of the economy—corporate profits, interest rates, and inflation—will put a floor under the stock market before this pullback gets much worse. Consumer spending remains solid, supported by a strong job market and rising wages. The Federal Reserve is at our backs. Interest rates and inflation are low. Earnings season has been better than expected. We urge patience on trade while acknowledging the risk that the dispute may drag into 2020. We maintain our year-end fair value target on the S&P 500 in the range of 3,000, about 2% above current levels.

NEW WEEKLY MARKET PERFORMANCE REPORT

We are pleased to share our new Weekly Market Performance Report with insights on major asset classes.

Click here to download a PDF of this report.

 

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 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

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 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.

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 # 1-881343 (Exp. 08/20)

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Currency Fears Emerge | Weekly Market Performance | August 9, 2019 https://mfg-nw.net/currency-fears-emerge-weekly-market-performance-august-9-2019/ https://mfg-nw.net/currency-fears-emerge-weekly-market-performance-august-9-2019/#respond Mon, 12 Aug 2019 03:38:57 +0000 https://mfg-nw.net/currency-fears-emerge-weekly-market-performance-august-9-2019/ The equity markets struggled in the week ending Thursday, August 8, weighed down by currency-related trade uncertainty after China retaliated against new tariffs by devaluing the yuan...

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  • The equity markets struggled in the week ending Thursday, August 8, weighed down by currency related trade uncertainty after China retaliated against new tariffs by devaluing the yuan. Several central banks cut interest rates, adding pressure on the Federal Reserve (Fed) to ease policy further. Despite these intentions, the U.S. dollar continued to strengthen, resulting in increased demand for U.S. Treasuries and other safe haven assets.
    • For the week ending Thursday, the major domestic equity indexes declined 3–4%, with the S&P 500 Index down almost 7% from its all-time high at Monday’s lows. It should be noted that at 2,850, the S&P 500 is about at the level where we reduced our recommendation from overweight to market weight on U.S. equities late last March. We continue to believe the index is fairly valued in the 3,000 range, and would prefer to see cyclical strength lead us there again.
    • The expectation for further central bank accommodation was a tailwind for growth stocks, which narrowly widened its lead on value for 2019.
    • Cyclical sectors led declines for the week ending Thursday, led lower by Energy (-7.1%), Financials (-5.4%), and Technology (-4.0%). Falling market interest rates boosted demand for “bond proxies,” like Real Estate and Utilities, as investors sought improved yields.
    • The picture was similarly distressing around the world, with both developed markets (-3.6%) and emerging markets (-6.2%) pulling back. Looser monetary policy from New Zealand, Thailand, and India limited capital inflows, resulting in increased demand for the U.S. currency.

    • Market interest rates plunged last week, roiling fixed income markets driven by anxieties over the U.S.- China trade war and its potential impact to the outlook for global economic growth. Declining yields in the U.S. resulted in a further flattening/inversion of the Treasury yield curve, increasing concerns about the potential for an imminent recession.
    • Despite the historical significance of prior flattening/inverted periods, we do not believe a recession is imminent. Economic fundamentals in the U.S. remain sound, especially when considering full employment, mild wage growth, and low inflation. Trade has weighed on manufacturing and business spending, but gross domestic product (GDP) still expanded by approximately 2.5% in the first half of the year.
    • Perhaps this explains the absence of stress in the credit markets, when viewed in the context of the TED spread, investment grade spreads, as well as high yield spreads. While safe haven strategies may be pushing down yields for global government bonds, credit-sensitive sectors have not approached areas indicating a lack of confidence.
    • The most curious aspect of recent market volatility has been the bid for the U.S. dollar, despite the Fed’s stated intentions. We view this as a reflection of just how accommodative other global central banks are, and intend to be, in the months and quarters ahead. Though not an official mandate, we believe the Fed needs to be mindful of currency dynamics and market signals, suggesting the need for lower rates.
    • Concerns about slower global growth were also evident in commodities last week, as safe haven seekers pushed gold above $1500 while simultaneously pressuring oil and copper prices.
    • In the week ahead, investors will digest reports on U.S. inflation, retail sales, and productivity. Global economic news includes China retail sales and industrial production, Eurozone GDP, and trade balance. Trade and tweets may also proliferate.

    Click here to download a PDF of this report.

     

    IMPORTANT DISCLOSURES

    This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance the products or strategies discussed are suitable for all investors or will yield positive outcomes. All performance referenced is historical and is no guarantee of future results. The economic forecasts set may not develop as predicted.

    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. Sector data is represented by S&P 500 GICS sub-indexes.

    Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.

    U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They 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.

    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 # 1-881748 (Exp. 08/20)

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    Market Insight Monthly | July 2019 https://mfg-nw.net/market-insight-monthly-july-2019/ https://mfg-nw.net/market-insight-monthly-july-2019/#respond Mon, 12 Aug 2019 03:19:23 +0000 https://mfg-nw.net/market-insight-monthly-july-2019/ Gross domestic product (GDP) increased 2.1% in the second quarter, bolstered by consumer spending’s 2.9% contribution to growth...

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    ECONOMY: CONSUMERS PROPEL U.S. ECONOMY IN JULY

    Consumers showed signs of strength in July’s U.S. economic data.

    Leading indicators fell month over month for the first time in 2019. Still, the Conference Board’s Leading Economic Index (LEI) rose 1.6% year over year in June. Even though leading indicators have slowed recently, the LEI continues to expand year over year, signaling future economic growth.

    Gross domestic product (GDP) increased 2.1% in the second quarter, bolstered by consumer spending’s 2.9% contribution to growth. Government spending added 0.9%, its largest contribution since 2009. Trade and inventories subtracted 1.5% from overall growth, after adding a similar amount in the first quarter, while business spending was a slight drag on growth in the quarter.

    The June jobs report, released in early July, showed nonfarm payrolls rebounded after a weak May [Figure 1]. The 12- month average pace of payroll gains remained in line with the expansion average.

    The pace of consumer inflation picked up for the first time in seven months. The core Consumer Price Index, which excludes food and energy, increased 2.1% year over year in June, higher than the 2% rate of growth in May. Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in May, below policymakers’ 2% target.

    Average hourly earnings rose 3.1% year over year in June, an eight-month low. Wage growth has moderated in recent months, but it has remained at a level that should continue to support consumer spending without concerns of overheating. Growth in the core Producer Price Index (PPI), which excludes food and energy prices, grew 2.4% year over year, the slowest pace in 11 months.

    U.S. manufacturing deteriorated further, caving to a global trend of weakness in the sector. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to 51.7, matching its lowest point since October 2016. Markit’s PMI ticked up slightly in June, but preliminary data showed the gauge fell to 50 in July, the threshold between expansionary and contractionary territory.

    Consumer sentiment and spending both increased, hinting that the U.S. consumer could continue to buoy growth. The Conference Board’s Consumer Confidence Index posted its third-highest reading of the economic cycle in July. Retail sales climbed for a fourth straight month in June.

    Still, corporate sentiment floundered. The National Federation of Independent Business’s measure of business confidence dropped for the first time since January. Year-over-year growth for new orders for nondefense capital goods fell to an eight month low in May, suggesting that trade tensions are still hampering business spending.

    Fed Cuts Rates, Ends Balance Sheet Runoff

    The Fed announced a 25-basis point (0.25%) rate reduction July 31, its first in 10 years [Figure 2].The Fed also said it would end its asset sales on August 1, instead of in October, in order to align its balance sheet and rate policies.

    Powell repeated his positive rhetoric on the U.S. economic outlook, going so far as to say he doesn’t see any economic sector posing a near-term threat to growth. He pointed out that consumer inflation was slowing, but added that the decision to lower rates was based on several factors, including slowing growth internationally and trade uncertainty.

    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.

    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 # 1-881507 (Exp. 08/20

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