Summer 2018 Quarterly Commentary

lake michigan park fence banner

K.I.S.S. is an acronym that stands for “Keep It Simple, Stupid”. Per Wikipedia, the KISS Principle states that simplicity should be a key goal and unnecessary complexity should be avoided. In its most simplistic sense, KISS could be applied to investing basics in coming months. Investors trying to ‘time the market’ and reposition their portfolios before midterm elections may be better off just holding tight.

 

Clients worried about a trade war or the extended duration of our economic advance should probably shift their investing focus to an ‘ownership mentality’ and look at individual company fundamentals. Increased volatility is to be expected during the summer months as liquidity is low due to most of us working on our tans at the beach. A simplistic, long-term approach may be just what the doctor ordered (sunscreen, too!). Enjoy your Summer!

Economic Positives

Jobs Galore! For the first time in American history, the number of available jobs currently exceeds the number of job seekers. This is strong evidence that our current economic recovery has ‘legs’ and may be more sustainable than many economists on Wall Street currently predict.

Corporate America gets the green light to invest. The Tax Reform Bill that was passed in December 2017 gives great incentives for small businesses to invest. Capital investment is beginning to accelerate due to the immediate expensing of these pro-growth investments. Small biz confidence is on the rise!

Banks pass the ‘stress tests’ with flying colors! The recent favorable bank stress test results reported by the Fed suggest that bank balance sheets and ability to lend are alive and well. This is quite favorable for our domestic growth prospects as bank loan growth is necessary to fuel our expanding economy.

Economic Negatives

Is the strong greenback becoming a headwind to growth? Our not-too-hot, not-too-cold economy continues to attract foreign investment capital. The 5% surge in the U.S. dollar over the last three months has some economists flashing warning signs. A strong dollar could hurt sales growth in coming quarters.

Will inflation take away the party punch bowl? “Lower interest rates for longer” commentary from the Fed has resulted in a risk-on, stock-friendly market. Recently stronger inflation data concern us. It has the potential to result in a more aggressive Fed, peak profit margins and problems for stocks.

Say goodbye to the synchronized global expansion! An extended period of synchronized global growth has come to a halt. Asia is mixed and Europe’s recovery is now in flux with Brexit concerns and a potential trade war weighing on several economies. Light summer trading could lead to increased volatility.

Market Negatives

Trade tensions are boiling over! The Trump Administration has followed up tough trade talk with action. Recent tariff announcements have resulted in a risk-off, range bound market. We believe continuing negotiations will result in one-off trade deals but in the meantime volatility is expected.

The market may be held hostage by the upcoming mid-term elections. As the Summer gives way to the Fall, we expect the tone of the political rhetoric to ramp up significantly before the November elections. With the fate of the Congressional leadership up for grabs, things could get interesting.

Is the Fed on the verge of a major policy mistake? We are becoming increasingly concerned with the flattening yield curve as reflected by the spread between two-year and ten-year U.S. Treasury yields. Historically, a flat or declining curve has preceded recessions. The Fed may want to slow the pace of rate hikes!

Market Positives

Repatriation is supportive to equities! Year-to-date, the top two sectors to return the most foreign cash back to the U.S. are Technology and Healthcare at $232B and $62B, respectively. This should result in a floor under the market via increased share buybacks. Mergers will likely increase, too. Very bullish!

Animal spirits are on the rise due to the Wealth Effect! Per the Wall Street Journal, last month Americans’ wealth (primarily driven by home equity and stock market assets) surpassed the $100 trillion mark for the first time! Consumers are confident and small biz confidence is at 45-year highs!

Fears of a sustained rise in long-term interest rates have dissipated. In February 2018, the rise in the 10-year U.S. Treasury yield above 3% put some fear into the equity market. Since then, long-term rates have pulled back (lower). Foreign investors continue to pour money into the U.S.! Great for U.S. bonds and stocks!