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Market Perspectives - July 2019


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Market Perspectives - July 2019

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Market Perspectives - July 2019

  1. 1. Market Perspectives - July 2019 Experience Insight Impact Overview: With 6 months of 2019 in the books, we reflect on the forces driving equity markets. It is important to weigh the evidence to assist in future positioning as market participants evaluate economic conditions. While this year has exhibited volatility one would expect during the advancing stages of a long bull market, this month we lay out a balanced view of a few positive and potentially negative factors impacting the investment climate as we advance to the second half of the year. 1
  2. 2. Positive - Yields Are Low Experience Insight Impact 2 Bond yields around the world are near lows for the past year. This provides for a climate with a lower cost of capital to be used for borrowing for such things as capital spending, real estate purchases, etc. The above graph depicts global 10-year sovereign debt yields in blue (and as you can see, some markets actually have negative yields). The blue dots are current yields compared to the past year, all very close to their lows (as of 7/23/19). Source: Bloomberg
  3. 3. Positive - Federal Reserve Update Experience Insight Impact 3 Source: Bloomberg • The above chart shows that the odds of a rate cut at the 7/31 Federal Reserve meeting are 100%. • Beyond that, the market currently expects that the Fed will cut rates at least two more times over the next year. • Once again, if implemented, this should help reinforce the availability of financing for individuals and businesses.
  4. 4. Positive - Earnings Growth Remains Strong Experience Insight Impact 4 Source: Bloomberg • Following a slowdown late last year, earnings have rebounded on a trailing basis and are close to the all-time quarterly highs for the S&P 500. • The sustainability of this earnings path will be critical if the market is to continue its growth going forward.
  5. 5. Positive - Unemployment Remains Low Experience Insight Impact 5 Source: Bloomberg The unemployment rate continues to trend downwards and currently rests near multi-decade lows. With consumption accounting for roughly 2/3 of the US economy, the unemployment trend remains very positive for growth.
  6. 6. Positive - Inflation Remains Subdued Experience Insight Impact 6 Source: Bloomberg Inflation, as measured by the Consumer Price Index excluding food and energy, remains benign.
  7. 7. Negative – U.S. Valuations Are Modestly Elevated Experience Insight Impact 7 Source: Bloomberg The white line represents the average current year projected Price/Earnings (P/E) ratio since 2005 of the S&P 500 and the green line represents the rolling current year P/E ratio over that time. As you can see from the chart, valuations are slightly elevated (18.1x) vs. the historical mean (15.7x). Markets elsewhere are trading for significantly lower valuations (Asia Pacific in yellow, Europe in blue, Emerging markets in orange).
  8. 8. Negative – Geopolitical Factors Experience Insight Impact 8 Source: Bloomberg Trade uncertainty remains a drag on the global economy. The green box above shows the declines in Asian exports for South Korea, Taiwan, Singapore, and Hong Kong since the trade uncertainty began ramping up in the 4th quarter of last year. In addition, political uncertainty reigns in several developed nations around the world.
  9. 9. Negative – Economic Data Has Been Soft in Some Areas Experience Insight Impact 9 Leading indicators have turned sharply lower in recent months. Source: Bloomberg Richmond Manufacturing survey exhibited one of the largest declines in years. Existing home sales remain weak, declining in the recent months despite a better rate environment. ISM Manufacturing new orders have fallen dramatically in recent months.
  10. 10. Negative – Rising Debt Experience Insight Impact 10 Over the long term, the continued upward march of absolute debt levels is concerning. While the threat is not imminent, the fact that debt is still rising in a relatively positive economic environment is worth watching. Source: Bloomberg
  11. 11. Market Perspective - July 2019 Experience Insight Impact Conclusion: While this is by no means an exhaustive list, these factors and others will continue to take shape over the coming weeks, months, and quarters. As they do, positioning by investors may shift. A flexible approach to investing, with the utilization of a variety of asset classes and strategies, continues to be our core philosophy. 11
  12. 12. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and are 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. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy. 12