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.

February 3, 2020

January 2020 Review

The start of January 2020 fostered a shift in sentiment toward an improving economic scene in Europe, the U.S. and China, which markets reflected. The picture reversed as the month matured. The Coronavirus challenged economic stability, escalating with its spread through month-end.

Global economic numbers quickly came into question, pumping up Wall Street anxiety. Furthermore, Bernie Sanders’ move in the Iowa polls advanced the possibility of the socialist platform succeeding. This combination shaved away all the early January advance producing a fragile market.

S&P500           January  -0.16%                           DOW               January   -0.99%
NASDAQ         January  +1.99%                          Russell 2000    January  -3.26%

Narrow Market

The last week of January clustered reporting from four major companies followed by one more on Monday, February 3rd. The top five companies constitute 18% of the S&P500 average. AppleFacebookMicrosoftAmazon and Alphabet. Coming into the last week 33.3% of the S&P500 and NASDAQ were in correction, down 10% or greater, while also navigating the latest update on the Coronavirus.

Apple (AAPL), Facebook (FB), Microsoft (MSFT) and Amazon (AMZN) have all reported quarterly earnings.

Apple traded +2.09%Facebook -6.13%Microsoft +2.82% and Amazon +8.72% after posting. Apple has now given up the gains and is below it’s pre-earnings pricing. Facebook continues to trade lower and Microsoft is slowly giving up the post-earnings gain…pretty good results.

Bond Picture

Fear of the Coronavirus spreading prompted in January a significant increase in negative interest rates. Rates continue to remain low which is positive for the $23 Trillion of U.S. government debt. Yields in Japan and Europe retreated below zero while the 10-Year U.S. Treasury slipped to a 1.5% yield range.

Global economies are now addicted to low interest rates and will likely continue or face dampening economic growth. The impact of low rates is material on senior savings for retirement, pension funds and insurers with unattainable interest projections.

Central banks have become comfortable with low interest, but the massive growth of debt looms off in the future. Ironically, low debt can’t foster economic growth above 2% and caps inflation.

Looking Ahead

Economic prospects in the U.S. are still promising. Assuming the Coronavirus is controlled, 4th quarter 2019 earnings are encouraging entering 2020. Liquidity provided by the Federal Reserve is major support. The next important impact will be a close election. The first week of February will focus on China’s update on virus numbers combined with Sanders results in Iowa.

January Purchasing Managers Index (PMI), released early Feb 3rd, advanced 3.1% to 50.9%. This exceeded expectations. Our sense is the U.S. market is best described as in a mini correction with no sign of a real recession.

Our strategy is to pause and wait for markets to settle. We are well positioned and watching our holdings closely.

The start of January 2020 fostered a shift in sentiment toward an improving economic scene in Europe, the U.S. and China, which markets reflected. The picture reversed as the month matured. The Coronavirus challenged economic stability, escalating with its spread through month-end.

Global economic numbers quickly came into question, pumping up Wall Street anxiety. Furthermore, Bernie Sanders’ move in the Iowa polls advanced the possibility of the socialist platform succeeding. This combination shaved away all the early January advance producing a fragile market.

January 8, 2020

The Start of 2020

2019 finished upbeat. Limited tax selling deferred gains forward into a 2021 payment, which helped markets grind higher through December. The key to performance came from earnings multiples advancing, up from 14x to more than 18x, with limited earnings increases. The price advance has either borrowed ahead or at a minimum put more pressure on advancing earnings for 2019. Improved sentiment followed, setting the stage for strong equity performance.​

S&P500:              December +2.86%,                 2019 +28.88%
DOW:                  December +1.74%,                2019 +22.34%
NASDAQ:           December +3.54%,                 2019 +35.23%
Russell 2000:    December +2.71%,                 2019 +23.72%

Start of 2020

The picture for the new year is, generally, positive. A strong consumer….Supportive Fed policy….China trade policy headed for initial level of agreement….Little indication of recession….Signs of global economic improvement and finally, Brexit moving toward a resolution. The only new offsetting risk is the tussle with Iran, which is settling down.

Wall Street projects earnings in the +3%-5% area for 2020. The 10-Year U.S. Treasury will probably move in the 1.5%-2.5% yield range. We believe that should these numbers come to fruition, a market return of 5%-10% (including interest and dividends) is achievable in 2020.

The Fed’s pro-growth policy has reinforced market optimism. There is little inflation in view and interest rates remain low. Wage increases have been absorbed so far. The current fiscal policy of easy money from the Fed (producing liquidity), coupled with support from Technology, are unique factors to developing the 2020 economic upturn. The wild card is the election. News related to it will produce volatility and significant swings in equity prices.

Projections

Projections for the full year are subject to change as the year develops. 2019 forecasts were widely off the mark with lower earnings offset by increased market multiples. Market moves develop in stages.

Q1 will start with the payroll report. This will indicate the pace of the current economic picture. This is followed quickly by corporate earnings. Super Tuesday is up next, developing the political landscape and the possible emergence of the Democratic candidate.

Remember, Trump’s candidacy started off as a long shot and the eventual nomination and win were also. What a shift. This election has similar characteristics with the Democratic roster. It will require the same attention to portfolios and the requisite adjustments.

GN&Co is non-political. Our role, as stewards of our clients’ assets, is to optimally position their portfolios to protect principal and profit according to client ground rules.

Final Thoughts

Non-farm payroll numbers this week will shed light on how the economy is developing. The release of corporate earnings results begins shortly. Our sense is the market, short-term, is ahead of itself and that a 3%-5% pullback wouldn’t surprise. This would settle optimism and establish a baseline to further advance going forward. That’s our view at this early stage.

Our sense is that 2020 is wide open, starting out slowly and progressing. We are optimistic but do not expect a repeat of last year.

We are always on guard to protect assets.

October 2019 Recap

The stock market finished higher for the last four weeks of October, developing a modest breakout at 3,038 for the S&P500. The previous high of 3,025 on July 26th was finally pushed through.

For October, the Healthcare sector led performance at +5% for the month. Technology and Telecommunications were +3.81% and +2.73% respectively. Energy lagged at -2.26%.

S&P500:       October +2.04%YTD +21.17%               DOW:                October +0.48%YTD +15.94%
NASDAQ:     October +3.66%YTD +24.97%               Russell 2000:    October +2.57%YTD +15.86%

Improved Market Turn

Stock prices finally muddled through long standing highs in the averages. The third Fed rate cut created potential support for the economy. Corporate earnings in Q3 were not great but acceptable. On average, down roughly -3% for the quarter.

A recent Barron’s poll for market expectations concluded with only 27% bullish prospects, the lowest level in 20 years. The somewhat erratic trade with China calmed, developing optimism for a positive conclusion. The U.S. consumer benefits from higher asset prices; i.e. stock prices. Home prices increased +1% in September and are +6% YTD.

The mood of markets has shifted with this support. The assumption is that central bank backing will start to take hold in three to six months out, resulting in improved corporate earnings. Our expectation is earnings in the +4% range for 2020.

Fixed Income

The 10-Year U.S. Treasury yield has declined 36% since January 1st, leading to lower interest rates across the board. As we all know, when yields decline pricing gains in bonds take place.

Our clients’ fixed income portfolio gains have been materially enhanced with higher bond prices layered on top of portfolio equity gains.

Towards Year End

The Fed has signaled a pause in further rate cuts but remain importantly accommodative. The market tone has turned. It is now supporting the view that global central bank stimulation will help promote more promising economic results starting in the 4th quarter.

The market question develops; Are we now pulling stock price increases forward, setting up for a pullback? Time will tell.

We have been participating in the improved market by purchasing equities which had already corrected and are well down from their respective highs. A positive but cautious strategy.

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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