A Dash of Seasonality
Summer officially ended a couple of weeks ago, and it certainly feels like fall is creeping in as we move into Q4. A chill is in the air as college football displaces wedding season…and I bet many of you have been getting up in the dark for weeks! Seasons play a big role in our lives. Be it summer vacations, holiday parties, or fall festivals at school, our yearly routines are influenced by seasons. Equity markets can often seem cold and mechanical, but they too exhibit seasonality.
US stocks are historically strongest in the fourth quarter. From 1988-2017, the S&P 500 returned 5.3% in the average Q4. This is two percentage points above the next best period. Companies offer outlooks for the year-ahead in Q4, which are often optimistic. Some investors are reticent to harvest taxable gains late in the year, and the timing of our election cycle could play a role in this anomaly as well. The Investment Strategy and Research Roundtable does not suggest Q4 returns have to be positive, but we welcome any potential tailwind amid what we believe remains a constructive investment environment.
Rates in Focus, Stocks Resilient: Interest rates across the Treasury curve rose consistently in September, likely foreshadowing the 9/26 rate hike by the Federal Reserve. The move in rates was balanced across maturities, leaving the spread between 2-yr and 10-yr rates narrow, which is a scenario we like for risk assets. Despite higher rates, US large-caps stocks were positive last month, as were developed market international stocks. Other key points:
- The 25 basis point (0.25%) Fed Funds hike in September was the 8th raise this cycle (the first was in December 2015). We expect the Fed to raise rates again in December of this year.
- Healthcare and Industrials emerged as leadership groups in Q3. We view periodic shifts in leadership as healthy for the market.
- The S&P 500 is trading at a Price/Earnings multiple of 17.3 based on estimates for the next four quarters. This is slightly above the 5-yr median, but reasonable given growth expectations, in our view.
US Economy on Strong Footing: Despite persistent trade rhetoric and broad political uncertainties tied to mid-term election outcomes, the US economy continues to expand. Tax cuts and rising wages are boosting consumer sentiment, and expectations are for US GDP growth to remain at or above 3% for the rest of 2018. The Leading Economic Index, an aggregate of 10 economic indicators and a key item we monitor, made a new cycle high with its most recent reading.
Opportunities: Having lagged oil’s move higher in 2018, we like adding exposure to the Energy sector. The group is expected to grow earnings at a faster rate than any other S&P sector this year, and in our view, adds a small layer of insulation from trade concerns and firming inflation. Some of the better values we identify across fixed income are in the municipal bond market. Your Wealth Advisor can help you identify specific actions that may be suitable for you.
No matter what season it is, we here at Hilliard Lyons stand ready to help you plan for your long-term financial future. --Spencer E Joyce, VP, CFA
Name to Know for October
CEO, General Electric
Larry Culp was announced as the new CEO of General Electric on Monday, October 1. He replaces John Flannery, who held the role for just over one year. Despite a short tenure, GE shares lost about half of their value under Mr. Flannery as turnaround progress proved relatively slow.
Mr. Culp is likely best known for his successful efforts leading Danaher, another industrial conglomerate. He becomes the first outsider to lead GE in the company’s 126 year history, and is of particular interest this month pending a potential revision to GE’s strategic vision.
US Equities: The S&P 500 returned 0.6% in September and 7.4% in the full Q3’18 three-month period.
Global Equities: Developed Market international stocks were fractionally higher in September; Emerging Markets were slightly lower. The US dollar index was unchanged.
Federal Reserve: The Fed hiked short-term rates by 25 basis points (0.25%) to a range of 2.00%-2.25% in late September. Odds of another hike in December are about 77%.
US Treasuries: 10-year and 2-year Treasury yields ended August at 3.06% and 2.82%, respectively. The spread between the two expanded by 1 basis points (0.01%) in September.
US Credit: Investment Grade and High Yield corporate bonds yield an average of 1.19% and 3.16% over Treasuries, respectively. These levels indicate little stress in credit markets.
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.