Friday, June 8, 2018

Market Insights - June 2018: Lower For Longer

Mark K. Nickel, CFP, CIO
Author position
Chief Investment Officer

Lower for Longer

Summer has unofficially begun here in the US, that glorious season where the days get longer and work hours get shorter. We love the beach and we like the ballpark, but grilling could be our favorite summertime activity. We can sear a steak in a matter of minutes – but to smoke a brisket, we have to temper the heat and be patient. The rewards may be similar, but we must let our brisket develop a bit “lower for longer.”

Reaping the rewards of investing can follow a similar pattern. Last year’s 19.4% rally for the S&P 500 was a big juicy steak for everyone, but returns will often accrue at a more measured pace. The Investment Strategy Group (ISG) believes we may soon transition into one of these periods where returns are “lower for longer.” Our view takes into account an aging economic expansion, full valuations, low (but rising) interest rates, and percolating inflation. During these times, ISG believes diversification and commitment to a plan are key, which your Wealth Advisor is equipped to ensure.

Core conversations consistent: Conversations at this month’s ISG roundtable held a strong degree of continuity from those in prior months. Strength in corporate earnings persisted, incremental economic data remains constructive, and fixed income markets continued to deal with rising rates during the month of May.

  • Companies comprising the S&P 500® grew profits by 26.4% in Q1’18. They are expected to grow EPS by 19.6% for the full year, which is well above long-term averages. Results were generally ahead of expectations, with about three out of every four companies beating average EPS and revenue estimates.
  • The US unemployment rate dipped to 3.8% in May, a low point dating all the way back to the 1990’s Tech Bubble. The index of Leading Economic Indicators hit a fresh high as well.
  • Markets are still projecting 3 or 4 rate hikes from the Federal Reserve this year, which is unchanged from a month ago.

Italy, one spicy meatball: Political turmoil and a spike in Italian bond yields grabbed headlines in May, but a coalition government with populist leanings was formed on May 31. Pockets of the new regime are seen as anti-European Union, although ISG believes Italy will remain in the EU. Exposure to Italian assets by US investors and institutions is quite small.

Opportunities: Alternatives to money market funds and interest- bearing bank accounts offer the potential to generate meaningful income on “cash” given a rise in interest rates. We also suggest focusing on short-to-intermediate term, high-quality bonds. ISG is actively coordinating with your Wealth Advisor to identify products and solutions that reflect these ideas.

Patience is often rewarded, although sticking with a plan can be daunting. Your Wealth Advisor is well-equipped to help you stay diligent and well-informed across all types of markets.
— Mark Nickel

Name To Know For June

Justin Trudeau
Prime Minister of Canada
Justin Trudeau, 46, was elected Prime Minister of Canada in 2015 and has been the head of its Liberal Party since 2013. Trudeau is of note this month ahead of hosting the G7 summit in Quebec and after exchanging public barbs with Donald Trump. Canada is the United States’ single largest trading partner, and has announced tit-for-tat tariffs on steel and aluminum. Trudeau has suggested Canada could selectively target other goods as well, leaving the future of NAFTA (a free trade pact) uncertain. Trudeau, the son of former Canadian Prime Minister Pierre Trudeau, was more closely aligned politically with former US President Obama.

Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or
estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.