June 08, 2020
Ending on June 3rd, the S&P 500 had the biggest 50-day rally in its history, gaining 37.7% over that period, and the NASDAQ Composite Index set a new all-time high on June 7th. As of the date of this letter, every stock in the S&P 500 is up over the last 10 weeks. S&P 500 valuations are the highest in nearly 20 years, as investors apparently think corporate profitability will dramatically increase relatively soon. The most common question we are receiving from clients is whether this rally can be sustained.READ MORE
Most likely you are asking the same question we are. What is going on in Washington? And how and when does it end? We clearly have an acrimonious situation in Congress that has caused a government shutdown. Coupled with the looming debt ceiling deadline of October 17th, this state of affairs is creating mounting uncertainty and great angst for investors. It must be remembered this is a political problem and most likely not an economic problem. Most economists forecast a shutdown that gets resolved within 30 days will impact 4th quarter GDP by just 0.1-0.2% and have no ongoing negative impact. In fact, our best guess is that GDP growth over the next two years will be relatively steady around the 2% level. This is certainly not robust growth but better than most developed economies.READ MORE
September 2013 marks the five-year anniversary of the financial market collapse in 2008; we have certainly come a long way in those five years. With the S&P 500 and the Dow eclipsing all-time highs and interest rates having stayed low for the longest stretch in 50 years, most investors have already received quite a benefit from the fount of cheap money. Since September 2008, a meaningful economic recovery has taken place. Look at the results since the equity markets bottomed out in March of 2009:READ MORE
In this low interest rate environment, income-minded investors, who have some tolerance for risk may find dividend-paying stocks attractive. In fact, nearly 40% of S&P 500 companies have dividend yields above the 10-year US Treasury bond yield.
The appeal of dividend-paying stocks is easy to understand as they can provide investors with regular income regardless of market conditions. In addition, many dividend paying companies increase their dividends over time thereby creating a growing cash flow over time versus the fixed coupons of bonds. It is important to note, however, that equities typically exhibit a higher volatility of returns than bonds, and the underlying company may choose to increase, decrease, and/or eliminate the dividend at any time. Regardless, we consider dividend paying equities an important part of a well-diversified income-generating portfolio.READ MORE
“For the loser now will be later to win
For the times they are a-changin’”
– Bob Dylan
With a modest improvement in unemployment, a nascent housing recovery and continued accommodative Federal Reserve, the US markets continued to generate positive returns, albeit with considerable volatility in the second half of the quarter. In the prior quarter’s Market Commentary in the Guardian, Randall Buck suggested that a short term pullback in the US market would not be surprising. That forecast was prescient indeed, from late May to late June, the S&P 500® had a peak to trough correction of 7.5% then posted positive returns in the final days of the quarter. READ MORE
In every life we have some trouble
When you worry you make it double
Don’t worry, be happy…..
– Bobby McFerrin 1988
While all of the problems the market has been worrying about for the last few years have not been solved, it seems that “the can was kicked down road” enough this quarter for investors to adopt the attitude of Bobby McFerrin. Stock market investors seem to prefer environments where the politicians in Washington “can do no harm”. Early in the first quarter clashes over the debt ceiling and spending cuts were deferred until later in the year and a compromise was reached over tax increases, turning the “fiscal cliff” into more of a “fiscal slope”. With worries about fiscal policy on the backburner, the continued pumping of liquidity into the economy through the Federal Reserve’s quantitative easing program and reasonable domestic economic growth, the stage was set for a market rally. The S&P 500 continued its pattern of the three previous years with a very strong first quarter rising 10.6%. Small Cap U.S. stocks, as measured by the Russell 2000 index, also advanced 12.4%.READ MORE
It came down to the very last minute, but compromise was made and the majority of the fiscal cliff averted. Not surprisingly the markets rallied early on news of the pending compromise. What was surprising was the resilience of the market during weeks of tough negotiations. Those expecting a repeat of the prior year’s debt ceiling debate and market fall were disappointed. With the compromise in place much of the uncertainty over tax policy has been put aside. The Bush tax cut rates have been made permanent for the vast majority of tax payers. Still ahead, a debt ceiling compromise and meaningful tax and spending reform as the fiscal cliff “fix” has added $4.6 Trillion to projected deficits over the coming decade. READ MORE
With the elections over, the media has turned its attention to negotiations between the U.S. House, Senate and Administration over tax policy and spending programs to avert what has been dubbed the “fiscal cliff” facing our country. One of our research resources, Strategas Research Partners, provides a list below of the various tax extensions, programs and spending cuts set to change in 2013 if action isn’t taken between now and year end. Investors have clearly been nervous about the outcome of these negotiations; the S&P 500 stock market index has fallen (as of November 16th) more than 6% from its early October level, with the NASDAQ composite and small cap stocks down even more.READ MORE
When making investments on behalf of our clients our views are being shaped by monetary policies both in the U.S. and abroad.
The Taylor Rule
A number of years ago John Taylor, a Stanford professor and noted economist, came up with a formula to guide how our central bank should set and change their interest rate policy in response to changing economic environments in light of fulfilling a dual mandate of low inflation and maximum employment. The formula, known as “The Taylor Rule” is based on the long term equilibrium real interest rate plus adjustments for the difference between current inflation measures and the central bank’s inflation rate target, as well as the current level of economic growth (GDP) compared to economic growth associated with full employment. Although few central banks have an explicit dual mandate, when the Taylor Rule is applied to the central bank interest rate policies of developed and developing countries the conclusions are pretty clear. Developed and developing countries have had interest rate policies that are more accommodative (interest rates lower than they should be) than is necessary to stabilize prices and promote full employment. This accommodative policy has been the case for much of the last decade.READ MORE