Another strong month for U.S. equities as all three indexes we follow were up strong on the back of strong corporate earnings. Global equities did not fare as well as the MSCI EAFE was down for the month. Our bond index, while still down for the year, was higher in August. Dollar strength continued as commodities continued to lag.
U.S. & International Stock Index Returns
|Index August 2018 Year-to-Date|
|Dow Industrials 2.22% 5.04%|
|S&P 500 3.18% 8.52%|
|S&P 400 (Midcap) 3.16% 7.58%|
|S&P 600 (Small Cap) 5.28% 17.31%|
|MSCI World 0.97% 3.33%|
|MSCI EAFE (2.39%) (4.57%)|
|Bloomberg Agg. Bond (0.96%)|
|CRB Commodity Index (0.37%)|
|US Dollar Index 3.73%|
All data as of 8/31/2018, Source: WFA Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The stock market has been good for investors this summer. August produced a solid positive moth for US equities as international (non-US) equities lagged. The S&P 500 (chart #1) and NASDAQ indexes both hit new all-time high levels as the Dow Industrial Average (chart #2) continued to work its way back toward its all-time high. Small-cap and mid-cap stocks are participating as well.
One change we continue to see that we mentioned last month is the relative performance gains from value stocks vs. growth names. After more than 18 months of severely lagging growth names value stocks appear to be at least holding their own once again. In our July report we were very tentative to declare a change
Right now there is not much more to say as the fundamentals (earnings) have been good and the technicals (charts) have remained positive.
Chart #1 – Source: www.stockcharts.com
Chart #2 – Source: www.stockcharts.com
The 10-year Treasury yield crept up slightly in the month of July, reinforcing the orderly uptrend that has now entered its third year. Yield remain just below the 3.00% level but we expect to see a move above the May 2018 highs at some point in the near future. Once that happened the real question is if the higher yield environment is a new move to higher levels or just a technical break higher that soon resolves itself back at lower levels.
Chart #3 – Source: www.stockcharts.com
Frequent readers know that we like to look at both short-term daily charts as well as longer-term weekly and monthly charts to look at what is happening over a variety of timeframes. Last month we noted that the dollar index at the 95 level was an area that has been both resistance and support over the past 4 years. In August the index made a move higher, peaking at 96.86 on August 15, before returning back to the 95 area. Right now this looks like a “fake out break out.”
Another possibility is that we are now in a long-term topping process and the index will return to much lower levels. Chart #4 shows the possible head-and-shoulders top set up. IF – and that is a big IF – the index makes a sustained break below 87 we would expect to see substantially lower values for the dollar vs. a basket of foreign currencies, possibly as low as the 2008 low (71.33).
Chart #4 – Source: www.stockcharts.com
Is the glass half empty or half full? The CRB commodity index is down slightly for the year but substantially off the May 2018 highs. August activity has, at least for the short-term, allowed us to comfortably assert our belief that commodities are in a downtrend. While it looks ugly right now, there is a real possibility that this move down is just a counter-trend correction in a move higher that started in early 2016.
Chart #5 – Source: www.stockcharts.com
At Magellan Financial we spend a lot of time talking with clients, giving advice as well as hearing investor thoughts on all things financial. Much time and effort goes into the investment planning so we make sure the individuals and families we work with are prepared for financial success. This process has more to do with asset allocation, savings rates and spending habits than what “the market” is doing. In an ideal world clients would be focused on the just the big picture. Since we don’t live in an ideal world we spend a fair amount of time discussing the markets (and all the “noise” surrounding the day to day movements) and “strategy” to deal with the latest move higher or lower.
This past month we had a few clients call who were nervous and asked about raising cash to “protect” their investment from the risks they perceived were lurking in the immediate future. While the specifics aren’t important, what is important is that the “risks” were all based on current news (“noise”) or projections of what “should happen” because of (insert issue here). These questions have come from a wide variety of clients.
Noise is just that – noise. Yes, what happened today in Washington DC or the latest scandal may have had an impact on stock prices today, but that really isn’t what is important. What the market is concerned with is company earnings and the general economic direction. Right now corporate America is doing very well with earnings at record levels and top line revenues growing stronger than we have seen in a long, long time. This is very positive for equities. That is not a precursor to a market collapse.
From an economic perspective the United States is in good shape as well. Growth has picked up recently off of a steady, long-term growth rate of about 2%. Second quarter growth came in at 4.2% and third quarter growth is also expected to be above trend. And people who want to work have a job or the opportunity to get one.
Historically September is not a good month for the stock market. In fact, September is the worse month for the market with an average return of (1.0%) according to research by economist Ed Yardeni. Of course historical averages are just that – averages. What happened in any given year can be much different than the average. Looking a little further ahead, Jeffrey Hirsh in the Stock Trader’s Almanac tells us that October through April is the best six month period for equities.
Sure, there are problems out there that may become bigger issues in the future. Tax cuts have helped boost economic activity but government debt has increased as a result. Trade with our largest trading partners is in flux as the federal government continues to negotiate with Mexico and Canada while increasing tariffs on Chinese imports. Bank regulations that came about from the economic crisis 10 years ago have been eroding, allowing banks more leeway with their investing capital.
But these are problems for another day.
Right now the underlying fundamentals for the stock market are strong. Earnings have been exceptional and the economic background is better than it has been in many years. We suspect that there will be some volatility in the near future but view that possibility more as an opportunity rather than a more serious issue with broader implications.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to consider our report. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
An index is unmanaged and not available for direct investment. Index returns do not reflect the deduction of fees, expenses or taxes. Returns are U.S. dollar based unless indicated otherwise.
Past performance does not guarantee future results and there is no guarantee that any forward looking statements made in this communication will be attained. The indices presented in this communication are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index
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Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
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Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com