Turn and face the strange
Don't want to be a richer man
Turn and face the strange
There's gonna have to be a different man
Time may change me
But I can't trace time
David Bowie - '72
After several discussions this week among the members of our Investment Strategy Committee, I came away with the following observations:
From Don Molé, our Senior Economist:
- The two key drivers of stock market returns during the first quarter, Federal Reserve monetary policy and a positive outlook on resolving the trade dispute with China, have now reversed. Statements from Jerome Powell, the Chairman of the Federal Reserve Open Market Committee on May 1 indicated the FOMC believes that risks to slowing global growth, particularly in China and Europe, the possibility of a disruptive Brexit, and uncertainty around unresolved trade negotiations had all moderated and therefore the Fed will likely not lower interest rates in 2019. Unfortunately, just in the last few weeks, we have seen a slowdown in global manufacturing activity. British Prime Minister, Theresa May, resigned her post on May 24 over her inability to negotiate an orderly Brexit. And finally, we have seen a breakdown in trade negotiations with China beginning with a Tweet from President Trump on May 10, with no resolution in sight.
- In light of the ever changing monetary policy narrative from the fourth quarter of 2018, to the first quarter of 2019, to now, we have adjusted our Core ETF strategy to take less risk and become more neutral. Our global-macro strategy, BetaWise, was restructured in February to a more defensive position. As the markets sort through new information, we are also seeing an increase in volatility. The S&P 500 has opened down 1% or more only ten times in the past ten years, all within the last 16 months. In five of those days, the stock market recovered to close up more than 1%.
From Matt Cushman, Manager of Equity Research:
- While the stock market hasn’t advanced much since January 2018, earnings have. Fifteen months ago, the S&P 500 index was 2872 and earnings per share were $143, resulting in a market price/earnings ratio of 20. Yesterday, the S&P 500 closed at 2783, but annualized first quarter earnings are $154, resulting in a market P/E of 18. Even with the recent soft patch, EPS has grown an annualized 13.2% over the last 3 years. While investor sentiment can (and does) have a major impact on price multiples and market performance over shorter intervals, trend market performance over longer time horizons tends to correlate with EPS growth.
- Although we’re down from the recent peak, the pullback has thus far been mild. Double digit drawdowns occur over half the time in any calendar year, with a typical decline of 13%.
- There are multiple forces at work within the U.S. and the larger global economy. For one, the world population is aging. Two, economic growth rates are slowing faster for the rest of the world than in the U.S. Third, the rate of technological change is accelerating, leading to increased productivity.
- We are continually making small changes within our investment strategies to keep them relevant to the changing world around us. It’s why we own Amazon instead of Abercrombie & Fitch for example. The impulse decision to move in or out of the stock market based on short-term indicators is a blunt tool that is far too disruptive for a well-thought-out investment strategy.
Jobless claims remain near 50-year lows
- Initial jobless claims fell 3,000 last week to 215,000, indicating that the labor market remains tight. The 4-week moving average also edged lower to 217,000 from 221,000.
- Continuing claims dropped 26,000 to 1.66 million and the 4-week average declined to 1.67 million from 1.68 million.
- The number of persons seeking unemployment benefits as a percent of the total number of persons unemployed has declined fairly steadily over the years. In the 1960s and ‘70s, unemployment claims averaged just over 40% of the total number of unemployed. Today, the 1.66 million persons on unemployment benefits is only about 26% of the total number of unemployed.
- Of some concern is the dwindling pool of available workers. With low unemployment, it becomes increasingly difficult to supply enough workers to fuel the economic growth engine. There are already 7.3 million job openings compared to only 6.3 million unemployed workers. The major issue is job training.
Consumer confidence rebounds even as trade tensions increase
- Despite escalating trade tensions, consumer confidence remains elevated. With low unemployment, rising wages and low inflation, most consumers have a positive attitude about their current situation.
- Even the expectations component of the most recent survey saw an uptick as an increased number of consumers said they expect their incomes to rise over the next 12 months.
- Plans to purchase autos, homes and major appliances also increased during May.
Internet sales continue to take share from traditional retailers
- U.S. e-commerce retail sales grew 3.6% during the first quarter to $137.7 billion or 10.2% of all retail sales.
- On a year over year basis, internet sales grew 12.4% while total retail sales grew at a more modest 2.7%.
- The importance of e-commerce in retail sales is increasing. Retailers continue to offer more products online, and technological advancements have provided more methods for consumers to place orders such as smartphones and tablets. This will come in handy as more people are working longer hours, decreasing the time they have for brick-and-mortar retail. Likewise, technological advancements have allowed online retailers to expand into faraway markets, increasing their customer bases further.
Changes- David Bowie
Interested in receiving more investment and economic insights?
Sign up to receive weekly portfolio manager meeting notes, our quarterly economic outlook or occasional emails related to current financial news. You can select which emails you want to receive and unsubscribe at any time.
Copyright © 2019 Old National Wealth Management - The material contained in this report may not be copied, reproduced, republished, posted, transmitted or otherwise distributed without prior written permission.
Investment instruments utilized by Old National Wealth Management are not FDIC insured, are not deposits or other obligations of Old National Wealth Management, Old National Bank, its parent company or affiliates, and involve investment risk including the possible loss of principal invested.
Investment and securities information presented herein is unique to Old National Wealth Management's approach to investment management. All information and opinions have been obtained from sources believed to be reliable and current at the time of publication, but are not guaranteed and do not claim to be a complete statement of all material factors. Examples or other representations made herein are for illustrative purposes and are not intended to be specific legal, tax, or investment advice and do not represent a solicitation.
Investments and strategies that may be presented may not be suitable for all investors. Old National Wealth Management Client Advisors and Portfolio Managers will work with interested parties to execute plans developed in consultation with their attorney or tax advisor.
The comments, views and opinions expressed herein are those of the author and Old National Wealth Management. From time-to-time, Old National Bancorp affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Old National Bancorp and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.