July 2018 - Mid-Year Review
- Markets are relatively flat thus far.
- Maintain optimism for long term investments and buying opportunities.
In our 2017 December newsletter, we wrote, "We have had plenty of bear market forecasters declaring doom and gloom during this nine-year long bull market. Eventually, markets pull back for a season until strength is restored. It is inevitable that markets take two steps forward and one step back. We are due in many ways for a pull back."
After a long period of growth and a great 2017, we thought we were due for a little more stock market fluctuations. We got it.
The first half of the year, the Dow Jones Industrial average is down 1.8% with the S&P 500 up 1.7%. The Technology and Small Cap sectors have been performing better while most International investments were worse. We had a huge January, an ensuing 10% correction, and slow grind back up. All in all – pretty flat year thus far.
Where Do We Go from Here?
It is a perfect time for investors to get back to the basics. Let’s explore together.
Corporate earnings are what drive the markets. Having said that, those earnings expectations are one of the hardest things to predict. Analysts are seldom 100% correct. Often times they get lost in weeds, struggling to overcome their own biases and blind-spots. Many corporations are also infamous for sandbagging their forecasts which make it difficult for analysts to be accurate.
It would be a misstep to ignore corporate earnings. Stock prices go up and down throughout the day and week based on social media posts, trade negotiations, geo-political news, statements on interest rates and potential inversions, inflation, and the talking heads all trying to titillate and exaggerate their claims. Our suggestion is to keep your eye on the ball - earning estimates keep rising.
At present, analysts expect the S&P 500 companies to earn $159 a share in 2018, $176 in 2019 and $194 in 2020. Each of these expectations have risen from the end of the first quarter.
Yes, we have things to worry about:
- Tighter monetary policy.
- Rising interest rates with a potential inversion.
- Building inflationary pressures.
- Trade negotiations.
- Geopolitical flare-ups.
- Mid-term elections.
Yet, the U.S. economy is continuing to grow.
- We had 25% earnings growth for the first Quarter of 2018.
- The U.S. economy has more job openings than job seekers. Our unemployment rate is the lowest in 20 years.
- The Commerce Department announced that retail sales soared 0.8% in May—doubling economists' estimates for a 0.4% increase. Retail sales are rebounding.
- Housing starts are now running at an 11-year high. Building permits are up 8% in the last 12 months. And, even with rising median home prices and higher mortgage rates, housing inventories are still tight.
- The National Association of Manufacturers just stated, 95.1% of manufacturers surveyed have a positive outlook for their companies. This is the highest ever reading in the 20-year history of this survey.
- The U.S. trade deficit is declining. In May, the U.S. trade gap narrowed by 3.7% to $64.8 billion. This completely took economists by surprise. The trade deficit is now at the lowest level in several months, which bodes well for sustainable GDP growth.
- Speaking of GDP, this quarter U.S. Gross Domestic Product growth is shaping up to be the strongest in several years. Economists are forecasting 4.5% annual growth for the second quarter, a level that would have been considered unheard of a few years ago.
Indeed, Investor optimism remains strong, but Americans are becoming wary of factors that could impact the economy. 77% of us think the stock market volatility is normal. 78% of us say they are very or somewhat confident the stock market is a way to build wealth (Wells Fargo Gallup Investor and Retirement Optimism Index).
The same poll states investors expect more volatility in the months ahead. Nevertheless, in investor minds, they are ready for it and have every intention to ride it out, recognizing the wisdom of a long-term approach to investing.
Warren Buffet recently told CNBC we are in the 6th inning of the current expansion with sluggers just coming up…
We are not sure what inning we are in. This economy may be as good as it gets and things settle from here. When growth starts to moderate, value and asset allocation can be more critical than ever. Our goal as advisors is to build a portfolio tailor-made to you for the long haul.
As volatility arises, do not be afraid, embrace it. This is the best time for long term investors to buy, reinvest dividends, and look to the future.
Hope you have a great summer!