S&P 500

Who's Afraid of The Big Bad Wolf?

The healthcare sector, that’s who. The worst performing sector in 2019 is also the sector with the highest expected revenue growth, and the second-lowest P/E ratio. Here’s an example: Anthem (ANTM) is down more than 20% from its February high but its sales are expected to grow 21% this year. The stock trades at 12 times earnings, a hefty discount to the overall market.


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.

Markets Set New All Time Highs Weeks After Brexit Selloff

 

What a difference a couple of weeks make. It was just 21 days ago when the global markets were caught off sides as UK citizens voted to leave the European Union. The move was largely unexpected and as a result, global investors sold first and asked questions later, scrambling to understand how this might impact their investments. As we have seen over and over, the markets do not like surprises or uncertainty and the Brexit outcome created both. Over two trading sessions, the EuroStoxx 50 Index sold off nearly 16% (in US dollars) and the FTSE 100 Index fell over 13%. The S&P 500 Index was not immune to the selloff and declined over 5% in sympathy with the global markets. And then suddenly, stock markets came roaring back. The EuroStoxx and FTSE averages have retraced most of their Brexit declines and the S&P 500 has rallied to new all-time highs.

Finding opportunity in the middle of uncertainty

The initial knee-jerk selloff reaction to Brexit appears to have been wrong. That is, the worst-case scenarios of global trade grinding to a halt and another European recession won’t likely play out. Brexit’s direct impact to the US economy will be minimal. However, the event has and will influence our capital markets in more subtle ways through currencies and interest rates. The event served to exacerbate some dominant market trends. 

For example, global markets will continue to favor US Treasury securities (and defensive dividend-paying stocks) because the US is seen as a safe haven in a troubled world and earning 1.4% on a 10 year Treasury bond is far better than losing money on an equivalent German sovereign bond. So whatever the Federal Reserve Bank presidents say, interest rates are likely to remain low for now. And the resulting strong dollar will help keep the lid on inflation.

For all of the above reasons, investors are looking for quality interest rate sensitive investments that still represent reasonable valuations. So where does an investor go to find value in this segment?

·  Interest rate sensitive assets like REITs are a viable investment vehicle and still represent good value, whereas utilities and telecom stock multiples are trading at multi-year highs.

·  Intermediate investment grade corporate bonds offer good yields and valuations, whereas floating rate and ultra-short maturity bonds will continue to under perform until rates begin to rise. 

·  Quality large cap blue chip growth companies that generate most of their revenues in the US and North America will be better positioned than companies with large European exposures. 

 

 Lighthouse has been building and managing our investment strategies for the past 24 months with a focus on quality large cap US investments that pay dividends.  The only shift in our overall outlook as a result of the UK vote is that interest rates will remain lower for longer and the US dollar will stay elevated and could even appreciate further. 

 

 


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.

Chicken Little and the Second Quarter Outlook

 

At the very beginning of 2016, it was as if someone flipped the “risk off” switch. Everything except gold and high-quality bonds retreated. Oil prices fell to $26/barrel and credit concerns came to the fore. And for the first time in quite a while, the word “recession” was thrown around with abandon in the financial news media. The sky was falling, of course.

We wrote to our clients on January 20th that investor fears were driven by four factors: currency, China, commodities and current earnings. But we asserted that an economic recession was not at all likely. And this piece bears repeating:

"Our view is that the stock market is in the process of testing support. We're guessing it will bottom at current levels or perhaps several percentage points lower. As evidence, we note a huge turnaround in stocks during today's session. The Dow, which was initially down 565 points, touched a key support level and rallied back to close down only 224 points. This bottoming process will continue over the next couple of weeks."

As it turns out, the S&P 500 Index bottomed on January 20th, although it would subsequently re-test that low on February 11th. This day also marked the bottom in oil and junk bond prices. To recap the damage, the major market averages had fallen 10-15% since the beginning of the year. By mid-February, the stock market’s all-time highs—set back in May 2015—looked pretty far away.

Since then, however, risk assets have been in recovery mode. The S&P 500 and Nasdaq are up something like 14% and 18%, respectively. The Dow Jones Transportation Average, which really struggled last year and was thought to be a harbinger of future declines, is up 16%. Ditto for the iShares High Yield Corporate Bond ETF (i.e. “junk” bonds), up 9%. Oil is trading back over $40/barrel. All this reminds us that panic isn’t an investment strategy, it’s an emotional response.

So what now? Let’s assess the four risk factors discussed earlier.

1.      Currency. The US dollar has weakened (finally) against a basket of foreign currencies, and it is now lower than it was a year ago.

2.      China. At the same time, the Chinese stock market and currency have been more stable. In other words, the worrying trends we saw in the last half of 2015 have reversed. In addition, the most recent trade-related economic data were more positive.

3.      Commodities. Perhaps the most important factor is rising oil prices. We recognize that oil is constantly pushed around by speculators. But consider the fact that the Int’l Energy Agency (IEA) predicts the global oversupply of oil will almost disappear in the second half of the year. The fact is that oil demand isn’t falling, whereas US oil production is falling.

4.      Current earnings. The combination of modestly higher oil and a weakening dollar should take some pressure off of corporate earnings as we move through the second quarter. Remember, plunging oil decimated energy sector earnings and the strong dollar hit industrials and consumer staples sectors especially hard. In addition, as pessimistic as Wall Street analysts have been over the past few months, note that corporate earnings for S&P 500 companies are expected to return to positive year-over-year growth in the third quarter. With less of a drag from external factors (i.e. geopolitics, slow economic growth in Europe), maybe we can focus on the fact that the US housing & job markets are fairly strong.  

It is our view that stocks will continue to trade with volatility because risk factors are still present. And the stock market is likely to trade in a range over the next few months as we wait for more clarity on corporate earnings, economic growth & inflation, the presidential election, etc.). But again, our research does not suggest recession is around the corner. So we offer some time-tested advice: one should avoid panic, and asses one’s investment time horizon. Those have always been good methods of fighting volatility. And once again, the sky remains intact- for the time being. 

 


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.