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Market Perspective - November 2018


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Market Perspective - November 2018

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Market Perspective - November 2018

  1. 1. Market Perspective – November 2018 Experience Insight Impact Overview: With markets around the world recently dipping into correction territory, investors are weighing the future. Markets are constantly climbing a wall of worry, and there are a few concerns which have come to the forefront. These concerns are set against the backdrop of a number of positive factors. This month, we weigh some of the critical data currently being used by market participants to measure progress. 1
  2. 2. Recent Concerns Experience Insight Impact 2 As we stated last month, the short-term environment continues to be dominated by a few primary fears: • The Federal Reserve’s (The Fed) efforts to increase interest rates may be too rapid and may stall the economy rather than slow it. • The ongoing global tensions continue to make forecasting more challenging for companies, given potential supply chain disruptions and potential profitability related issues. • Identifying reasonable economic and earnings growth rates given the challenges mentioned above, has left investors questioning the appropriate “market multiple” to apply to future earnings. • Longer term concerns about deficits and debt linger prominently in investors’ minds.
  3. 3. Recent Interest Rate Impact Experience Insight Impact 3 • The Fed has been steadily increasing interest rates for several years with an acceleration in 2018. • At least 3 more increases over the next year are currently widely anticipated. • The increase in rates, particularly the recent moves, has slowed interest rate sensitive portions of the economy, such as housing and auto sales. Source: Bloomberg
  4. 4. Trade Concerns Experience Insight Impact 4 Over the short-term, markets have been increasingly correlated to trade headlines, particularly those associated with China. Source: Neuberger Berman, “Investment Strategy and Asset Allocation”; Bloomberg, June 11, 2018 Source: Neuberger Berman, “Investment Strategy and Asset Allocation”; Bloomberg, Oct. 10, 2018
  5. 5. Earnings and Valuation Multiples Experience Insight Impact 5 So far this year, earnings growth has been exceptional (with the tailwind effect of a new corporate tax policy), and sustaining the earnings growth rates of the past few quarters will prove difficult. Market participants are struggling to figure out where growth rates will fall out. The chart above shows quarterly sales growth on the top and quarterly earnings growth on the bottom. The current quarter (Q3 2018) is highlighted by the vertical yellow line, with the orange bars to the left reflecting historical quarterly data and the orange bars to the right reflecting the analyst community’s quarterly projections. You can see the dramatic drop off in future expectations. Source: Bloomberg
  6. 6. Federal Deficits Continue to Mount Experience Insight Impact 6
  7. 7. Positive Factors Experience Insight Impact 7 With these risks in mind, it is important to recognize that current economic conditions remain strong, against a backdrop of valuations which remain reasonable (assuming growth does not become negative). Positive factors include: • GDP growth and critical components of the domestic economy remain strong (e.g. labor). • Earnings growth remains robust. • Valuations are within normal bands, and we currently are not at extreme levels.
  8. 8. GDP is Steady and Growing Experience Insight Impact 8 Source: Bloomberg
  9. 9. Earnings Update Experience Insight Impact 9 Source: Bloomberg
  10. 10. Valuation Multiples are Reasonable Experience Insight Impact 10 As highlighted above in yellow, the S&P 500 is within the midpoint of most historical ranges for various valuation measures.
  11. 11. Market Perspective – November 2018 Experience Insight Impact Conclusion: The weight of the evidence is presently mixed, with strong growth and reasonable valuations dominating the current landscape, offset by concerns about future direction. Investors are closely monitoring conditions as they evolve, with a particular eye towards the Fed’s actions and global trade talks. While we currently believe the investment environment remains modestly favorable, we are actively watching for signs of a shift, and we remain focused on the long-term. 11
  12. 12. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 12