Market Commentary

February 2019 Review - Surprise Action

The S&P500 faltered in the last three days of February but recorded the best two month start for the year in close to thirty years.

  • S&P 500: Feb: +2.97% YTD: +11.08%
  • DOW: Feb: +3.67% YTD: +11.10%
  • NASDAQ: Feb: +3.44% YTD: +13.52%

Surprise Action

December 2018 registered a major downdraft for the S&P500 -9.18% and the DOW -8.66%, posting dramatic lows on Christmas Eve. The subsequent reversal rally of January and February caught investors off guard. Conventional market wisdom suggested that those who missed the early signs of the upswing would have a second chance at the retest of the December lows. A retest would confirm an established bottom.

Instead, the market moved up in a straight line from late December through the end of February. The Federal Reserve’s easier stance toward 2019 rates solidified market response. The “wait and see” development coupled with the prospect of a favorable outcome in trade negotiations with China eliminated a retest and turned consumer confidence on the optimistic side. The retest never developed.

A Look Ahead

The global picture still poses potential problems. Europe, Japan and China are economically weak. U.S. corporate earnings are showing significant earnings decline. Q1 is apt to add up to less than 2% GDP growth…coupled with continued strong job creation, it will likely lead to 0% productivity growth. Low interest rates and the U.S. 10-Year Treasury at 2.73% (Feb-28) support the alternative to lower rates.

U.S. corporate earnings declined in Q1 while the S&P500 has marched forward. The S&P500 and DOW both stalled in the last three days of February and produced a positive reversal on Friday, March 1st.

Market action is relying on a resumption of growth later in 2019. Constructive news from the China negotiation could add another 5% to the averages. A pullback in the averages would likely follow.

We are closer to a modest pullback than a major upward swing. There is a lot of cash (best performing asset class in 2018) on the sidelines yet to participate. Memories of the December debacle returning keeps cash on the sidelines.

The S&P500 level of 2,800 has been addressed multiple times since early 2018 with no sustained success. Our sense is we are vulnerable to a modest pullback followed by improving results later in the year.

We expect a positive year in 2019.

First Quarter 2019 Overview

The S&P500 faltered in the last three days of February but recorded the best two month start for the year in close to thirty years.

  • S&P 500: March +1.79%, YTD +13.07%
  • DOW: March +0.05%, YTD +11.15%
  • NASDAQ: March +2.61%, YTD +16.49%

The month of March ended the first quarter on a high note, close to 4% below the S&P500’s all time high recorded Sept ‘18. Not all investors participated. The December downdraft drove many to the sidelines and they missed the bulk of the rebound.

Factors dominating momentum were; another potential shift in the interest rate picture, the tariff outlook with China, fear of a global economic slowdown and market sentiment impact from the Lyft IPO and the pending Uber IPO.

The Federal Reserve chairman asserted twice that the board was pausing on increasing rate attention through 2019. This was an appealing statement welcomed with a positive market response. No sooner said than done, the yield curve inverted raising the specter of a shift from a dovish Fed to an impending rate increase.

Larry Kudlow came forth with the suggestion of a half point Fed increase, which left the market dismayed. The divergence between rising stock prices and falling bond yields was puzzling.

The agreement with China has been elongated with “things are going well” rhetoric providing comforting support. No resolution would be a real market setback. The final conclusion keeps shifting out in time. The composite of the decision is not clear. We would be inclined to take advantage of a 6%-8% market upswing which would likely follow a positive outcome.

Both Germany and France are teetering on recession with interest rates on government funds virtually negative. China, which has slowed, is moving to cultivate Germany which has implications for U.S. tariff negotiations. Europe is close to a bottom barring a major mishap with Brexit.

The Lyft IPO has received abundant press as a market stimulant. Clearly, the attention has brought participants back to the market that had been fearful after the December demise.

Lyft’s pricing was set at the top of the range ($72ps), a $20+ billion valuation. Our sense is that the valuation was extended with no profits in sight through 2022. Further, Lyft is priced at one fifth the level attached to the upcoming Uber offering, which has international involvement.

A settling of Lyft’s value would dampen the public market price of the Uber IPO. The crowded scene will require much more investment. The competitive picture is still taking shape and years away from profitability. Our reading is that the IPO market enthusiasm will become more discerning, losing momentum.

The first quarter of 2019 will test the market’s resolve with lower corporate earnings. Stock prices are 16.5x S&P500 earnings and are likely to withstand soft earnings reports should they provide evidence of rebounding from Q4. Does the global economy begin to turn up as central banks continue to support with low rates?

We judge the rally in stocks being close to pausing and we expect confirmation of growth returning to extend higher stock prices.

Third Quarter 2019 Review

The DOW and S&P500 both finished the September quarter modestly higher with the NASDAQ slightly lower and the Russell 2000 down the most at -2.76%

The trading tone favored defensive sectors. Both Gold and Utilities finished September +8% YTD, while Consumer Staples ended +5% YTD. On the negative side, Metals & Mining declined -1.85% YTD, Energy -7% YTD, Healthcare -3% YTD and Materials and Financials were essentially flat.

S&P 500:            Sept +1.72%,  Q3 +1.19%YTD +18.74%
DOW:                 Sept +1.95%,   Q3 +1.19%YTD +15.39%
NASDAQ:           Sept +0.46%,   Q3 -0.09%,   YTD +20.56%
Russell 2000:    Sept +1.91%,   Q3 -2.76%,   YTD +12.96%

Performance of small-cap stocks and tech volatility evidence the NASDAQ and Russell 2000 drag on their averages.

Market Picture

The trading scene remains constant except for the impeachment addition. Headlines still impact daily direction of stock prices. The trade outcome with China dominates the action. The potential for Fed rate adjustment remains important psychologically. Our sense is the Fed will step up rate cuts along with the European Union.

The election result, which is up for grabs, clearly must be factored into eventual market direction. The technical side has taken a hit with the faltering IPO market. Currently, 50% of recent IPO’s are below the initial offering price. This diminishes trading enthusiasm. An additional negative will be slim legislative action while congress is busy attempting to unseat Trump.

Q3 corporate earnings will be released shortly and weigh in on the prospects for stock prices.

Treasury Yields

The bond market has been searching for a low in yield and has come close at 1.64% on the 10yr-Treasury. Bonds at this level are less competitive to stock investments.

6 Month:         current yield 1.807%,   3Mo ago 2.099%change -13.93%
2yr Note:         current yield 1.615%3Mo ago 1.753%change -7.84%
5yr Note:         current yield 1.544%3Mo ago 1.768%change -12.67%
10yr Note:       current yield 1.666%3Mo ago 2.005%change -16.93%

Long duration U.S. Treasuries have been outstanding performers, with yields down close to 50%. The price movement, which is inversely correlated to yield, provided welcome relief to fixed income investors.

Year End

The market headwinds remain unresolved. The preponderance of issues facing the stock and bond markets suggest a cautious outlook toward stocks. Short maturity issues in fixed income remain workable. Q3 brought a defensive posture back into the picture with a positional turn to value and heightened selectivity.

We are proceeding patiently awaiting the inevitable clarity to develop.

Commentary Disclosures

The information contained in this investment research has been compiled by Garrett Nagle & Co., Inc. from sources believed to be reliable. No representation or warranty, express or implied, is made by Garrett Nagle & Co., Inc. as to its fairness, accuracy or completeness. Garrett Nagle & Co., Inc. has not independently verified the facts, assumptions, and estimates contained herein. This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product. Garrett Nagle & Co., Inc., their officers, directors, employees or clients may have a position in any securities mentioned above. All estimates, opinions and other information contained in this investment research constitute Garrett Nagle & Co., Inc.’s judgment as of the date of this investment research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. Investments in financial instruments carry significant risks, including the possible loss of the principal amount invested. Past performance is not a guarantee or indication of future results.

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Founded in 1976, Garrett Nagle & Company is a boutique investment management firm specializing in managing portfolios for high net worth individuals and institutions. Based in Woburn, Massachusetts, our portfolios are separately managed and customized according to each client’s individual risk tolerance and return objectives. The firm is a Registered Investment Advisor with the SEC.

Founded in 1976, Garrett Nagle & Company is a boutique investment management firm specializing in managing portfolios for high net worth individuals and institutions.


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