- All major markets, domestic and international, cooled off in August after the impressive July market rally
- Best performer: Volatility Index (VIX), up 13%
- The index still averaged its lowest monthly level in over two years just before the two most historically volatile months (September and October)
- The S&P 500 returned just 0.14% on the month
- This was the sixth month of positive performance for the index
- Top Sectors: Financials, Technology, Energy
- Financials turned positive on the year as the chances of a September Fed rate hike increased
- The reversal out of defensive sectors continues as Utilities and Telecom were the worst performers
- All sectors are now positive this year with Healthcare being the worst performer (0.73%)
- The Russell 1000 Value index outperformed the Russell 1000 Growth index by 1.3%
- Year-to-date the spread between value and growth is over 5%
- The MSCI EAFE index also posted a modest gain, up only 0.08% on the month
- Local currency returns of international countries were slightly higher, but the US dollar halted its decline on the back of higher US Treasury yields
- The long-term Treasury market halted its rally with a -1.05% return during August
- Investment-grade corporate bonds reversed their underperformance against long-term Treasuries, returning 0.27% on the month
- The July jobs report came in higher than expected with the U.S. creating 255,000 jobs during the month while the unemployment rate held steady at 4.9%**
- Average hourly earnings grew 2.6% year-over-year, the highest since the Great Recession**
- The Bank of England lowered its growth forecast for 2017 causing them to cut their benchmark interest for the first time since 2009 to 0.25% from 0.5%
- Conversely, several U.S. Federal Reserve members at their annual Jackson Hole meeting stated that a rate hike could come soon if economic data continues to show positive signs, including Chairwoman Yellen
Asset Performance (Total Return) 08/31/2016 *
*Bank of America Merrill Lynch
***Charts are shown for illustrative purposes only
Low Yields, High Valuations, Market Top?
WHAT IS THE CURRENT SENTIMENT ABOUT STOCKS AMONG INVESTORS?
- Are we at a market top in this bull market? If so, why doesn’t it feel like one?
- Where is the irrational exuberance for stocks we usually see at a market top?
- At market tops investors believe stocks have a lot more room to run. Are investors thinking that?
- At market tops there are plenty of reasons to invest in stocks. What reasons are out there right now? The economy? Hillary? – Hmmm.
LOOK WHAT WALL STREET IS RECOMMENDING FOR ALLOCATION TO EQUITIES TODAY IN THE CHART BELOW.****
LET’S COMPARE WALL STREET SENTIMENT IN 1999 VERSUS TODAY.
THE 1999 BULL MARKET
- PERCEPTION: The New Economy was permanent and will last for decades justifying the extraordinarily high price-to-earnings multiple (P/E) and a continued bull market
- REALITY: Trailing P/E on S&P 500 was 31 times earnings and company profits were peaking
- PERCEPTION: Portfolios should be invested in New Economy stocks where the growth would be (Technology, Telecom, and Media)
- REALITY: The average forward P/E on these growth sectors was at 72 (yes, that was the average) AND they represented 40+% of the S&P 500 market capitalization
- PERCEPTION: Caution, Income and Safety were not important. Growth was all that mattered.
- REALITY: 10-year Treasury was yielding 6.4% AND inflation was at 2.7%
- What Happened?: When the 1999 bull market ended the S&P 500* had 3 calendar years in a row of negative returns
TODAY’S 2016 “BULL MARKET”
- PERCEPTION: Slow, possibly zero growth in the global economy, fear of a 2008 market, and another recession.
- REALITY: Year-over-year trailing earnings looks to be poised to rise for the first time in six quarters on the back of increasingly positive U.S. economic data
- PERCEPTION: The stock market is overvalued
- REALITY: P/E multiple for S&P 500 is just over 25 with high growth companies averaging a P/E of 13 and not one sector of the S&P 500 dominates more than 20% of the market capitalization
- PERCEPTION: Portfolios should be in “safe” assets such as bonds focusing on income not growth
- REALITY: The chart below shows that all 500 stocks in the S&P would currently yield around 4% if they paid out 100% of their profits at once. This compares very well to a “safe” 10-year Treasury that yields only 1.5% with inflation at 1%. In addition, the current dividend yield on the S&P 500 is 2.4%.**
SO WHAT DOES THIS MEAN TO YOUR PORTFOLIOS AT ARGI?
Evidence suggests that the current stock market may be overvalued compared to historical norms but can be justified because of low bond yields. Even if rates start to rise this may be a positive signal that we are coming out of the “profits recession” (discussed in last month’s Market Insights). More profits for companies usually means higher stock prices. However, stocks don’t go straight up. They can and do correct when prices get ahead of earnings. Regardless, our core beliefs remain consistent: plan, remain diversified, and invest in-line with your risk tolerance and long-term goals. Whatever happens in the near term, we remain confident that holding steadfast to these core beliefs increases your probability for investment success. *** Until next month….
* S&P 500®: Standard & Poor’s (S&P) 500® Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries
**Source: Bloomberg Finance L.P.
*** Diversification does not assure a profit or protect against a loss
****Charts are shown for illustrative purposes only