Snowballing Rally
Doug Walters
As we await the arrival of winter storm Harper in Upstate NY, U.S. equities continue to accumulate gains in 2019…
Market Review
Contributed by Doug Walters
U.S. equity markets are up for the fourth straight week, continuing the “Santa Claus rally.” The S&P 500 has climbed over 13% from the Christmas Eve low, clawing back more than half of the losses from the September peak. For those who like to keep track, we are now out of “correction” territory. What is driving this rally?
Beating Expectations
We laid our case for optimism a few weeks ago (Why We Are Buying – Reprise). This week we add to that: rumors of further progress in Chinese trade talks, commentary from multiple Federal Reserve governors that they intend to be “patient” with rate increases, and positive earnings results from the first group of companies to report their Q4 earnings. To-date, about 10% of companies have reported results with 75% of them beating expectations. We discuss some of them in our stock section below.
What the market appears to be content to ignore for now is the longest U.S. government shutdown in history. Investors are still betting the dispute will end without meaningfully hindering the economy. While the lack of paychecks is undoubtedly impacting the lives of those directly affected, for now, the U.S. stock market is taking it in stride. If the shutdown continues, there will come a time when economy watchers will grow concerned, but that may also be the trigger for lawmakers to strike a deal.
Note: Martin Luther King Jr. Day will be observed on Monday, January 21st. Stock and bond markets will be closed.
No longer in correction territory
After falling 20% from September’s market peak, U.S stocks are now down just 8.3% thanks to a near 14% Santa Claus rally. We are no longer in “correction” territory.
Strategy Update
Contributed by Max Berkovich ,
ASSET ALLOCATION
Standing Tall
Progress on a trade deal between U.S. and China helped distract investors from worries over the government shutdown, pushing global equities higher. U.S. Small and Large-Cap led the pack this week with both adding over 2% to their performance tally. Bonds had a near flat week, while gold declined slightly. U.S. Small-Cap stocks are the best performers on the year, propelled by several factors…
- Better valuation – the swift decline in the 4th quarter of 2018, made valuation of the asset class very attractive. The twelve-month trailing price to earnings ratio dropped to the lowest level since 2011 and, relative to the S&P 500, valuation stands at near 10-year low.
- Higher earnings growth – while large companies are moderating their earnings growth projections, Small-Cap stocks are standing tall. According to FactSet, the Street estimates double-digit growth for the Russell 2000 small cap index.
- U.S. centric – small companies have less exposure to international markets than larger companies. This makes them attractive for those investors who are looking for direct exposure to the U.S. economy. Also, the strong dollar tends to be less of a headwind for these companies.
- Better rates, better profits – last December, the U.S. Federal Reserve stated that they will approach monetary policy with more flexibility given that the overnight lending rate is near the normal rate (a point at which monetary policy is no longer accommodative nor tight). Lower rates help the little guy, because they are generally more leveraged relative to their Large-Cap counterparts, do not have easy access to global debt markets, and tend to borrow at higher rates.
- A word of caution – While we may favor Small-Cap stocks right now, the asset class comes with risks. These companies are more volatile, tend to be less transparent, are more leveraged, may have a concentrated customer base, and have less liquid stocks. These are all factors we consider when sizing our allocation.
TAKING STOCK
Banks Bat First
During a very pleasant week in the markets, the Materials sector was the laggard, with Utilities right behind. The sector that had the best week was Financials thanks to the kick-off to the 4th quarter earnings season. Speaking of those earnings…
- JPMorgan Chase & Co. (JPM) started the earnings release parade on Tuesday with a slight miss on earnings. But a 7% year-over-year increase in core loans for 2018 was enough good news for investors to overlook the poor 4th quarter and the lackluster fixed income trading results.
- On Wednesday, Bank of New York Mellon Corp. (BK) had a similarly uneventful quarter, but a very small decline in assets under custody and/or administration was enough to evoke optimism. US Bancorp (USB) topped estimates and reported better interest income results and better expense management, all positive developments.
- On Thursday, BB&T Bancorp. (BBT) led off with a slight beat. But an increase in net interest margin and growth in non-interest income was a hit with investors. This set up a nice situation for M&T Bancorp (MTB) which batted clean up. The Buffalo, NY based bank did not disappoint. M&T beat earnings consensus by $0.30. The bank reported better interest income, higher fee income and loan growth. If the triple-play was not enough the company also served up solid guidance. The bank is what you would call a two-way player, offering offense (interest income and fee growth coupled with loan growth) and solid defense (a conservative and strong credit culture).
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 2.9 | 6.5 |
| S&P 400 (Mid Cap) | 3.0 | 9.3 |
| Russell 2000 (Small Cap) | 2.4 | 9.9 |
| MSCI EAFE (Developed International) | -0.2 | 3.7 |
| MSCI Emerging Markets | 0.8 | 4.5 |
| S&P GSCI (Commodities) | 0.8 | 8.5 |
| Gold | -0.6 | -0.2 |
| MSCI U.S. REIT Index | 2.1 | 6.5 |
| Barclays Int Govt Credit | -0.1 | 0.0 |
| Barclays US TIPS | -0.5 | 0.2 |
About Strategic
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.
OverviewDisclosures
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.