Volatility, We are Stronger than We Think
Volatility abounds in our daily lives. We’ve all battled a cold. We’ve all been stuck in traffic. Many of us have had to work over college football weekends! These are kitschy examples, but we as humans are quite resilient at navigating obstacles, because we are often empowered to do something. We can make chicken soup. We can take side streets.
When it comes to volatile markets however, we often feel powerless. But I am here to tell you we are not powerless. In uncertain times, we can adhere to our long-term financial plans. In uncertain times, we can be greedy when others are fearful (says Warren Buffett). In uncertain times, we can seek to understand what is happening in politics, across the economy, and at the companies we own.
That is not to say this is easy, but this is why Hilliard Lyons exists. We were here to assist during the Great Depression, WWII, the ’87 crash and the Tech Bubble. We are here for you now. The Investment Strategy and Research Roundtable focused on recent volatility this month as there were legitimate reasons for assets to be jostled a bit. We believe conditions remain sound for long-term wealth creation.
Volatility, Why Now:We believe volatility is partially due to rising interest rates. The fear is that higher borrowing costs could stymie the economy. We believe election uncertainty and conservative company earnings guidance are also playing a role. Nonetheless, the US economy continues to expand (US GDP grew 3.5% in Q3’18) and US companies continue to grow. Key points to consider:
- The S&P 500 is trading at a Price/Earnings multiple of 15.9 based on estimates for the next four quarters. This is below the 5-yr median. Valuation is modestly compelling, in our view.
- 10-yr Treasury rates remain above 2-yr rates. This relationship typically inverts prior to recessions.
- Party control of Congress is likely to be a persistent post-election narrative. Neither is necessarily ‘good’ or ‘bad’ for markets.
Strong Earnings Season: The Q3 reporting cycle for US companies is about 75% complete. Earnings growth for the S&P 500 is tracking at 26.5%, which is very strong by historical standards. Lower taxes are boosting bottom lines, and seem to be stimulating consumer demand. Revenues are on pace to grow 8.7% for the quarter. Companies are a bit concerned over the impact that tariffs will have in 2019, but the current pace of activity across the global economy is swift.
Opportunities: The Roundtable prefers higher quality bonds right now, which includes US Treasuries. We also like shorter-term maturities. In general, there is little added yield for assuming greater credit risk and for locking funds up for longer periods of time. Across equities, we see opportunity in traditional Value-oriented sectors like Energy, Financials and Utilities. Your Wealth Advisor can help you identify specific actions or products that may be suitable for you.
We know (and you know) that you are resilient. We have countered obstacles in the past and likewise will do so again in the future. Together we are strong, and will effectively navigate financial markets.
--Spencer E Joyce, VP, CFA
Name to Know for November
Mohammad bin Salman
Crown Prince, Saudi Arabia
Mohammad bin Salman is one the most powerful men in Saudi Arabia. The Saudi Kingdom is the single biggest exporter of oil in the world, and is a key US ally. The Crown Prince is appointed by the King of Saudi Arabia.
The Crown Prince is of note this month given the unfolding saga of the disappearance of a Washington Post journalist. He is rumored to have had knowledge of the covert operation, which has strained relations with the United States. Broadly, The Kingdom is noteworthy given reintroduction of Iranian sanctions that they support.
US Equities: The S&P 500 fell 6.8% in October (total return), its weakest month since September 2011.
Global Equities: Developed and Emerging Market international stocks were down 9% and 8% in October, respectively. Weighing on returns, the US dollar index gained about 2%.
Federal Reserve: The Fed did not meet last month, but continues to suggest rate normalization (higher rates) will continue. Odds of a Fed hike in December are ~75%.
US Treasuries: 10-year and 2-year Treasury yields were 3.20% and 2.82%, respectively, as of 11/5. The spread between the two expanded by 6 basis points (0.06%) in October.
US Credit: Investment Grade and High Yield corporate bonds yield an average of 1.32% and 3.63% over Treasuries, respectively. High yield weakened alongside equities.
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.