Bradley Cable Blog https://bradcable4.com Tue, 12 Mar 2019 04:48:09 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.4 Modest Pullback Or Something Bigger? | Weekly Market Commentary | March 11, 2019 https://bradcable4.com/2019/03/12/modest-pullback-or-something-bigger-weekly-market-commentary-march-11-2019/ https://bradcable4.com/2019/03/12/modest-pullback-or-something-bigger-weekly-market-commentary-march-11-2019/#respond Tue, 12 Mar 2019 04:48:09 +0000 https://design1.bradcable4.com/?p=10401 The post Modest Pullback Or Something Bigger? | Weekly Market Commentary | March 11, 2019 appeared first on Bradley Cable Blog.

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<![CDATA[

KEY TAKEAWAYS

  • Following such a strong rally since the December 24 lows, a pullback is reasonable to expect.
  • We expect additional stock market weakness beyond last week’s more than 2% decline to be modest.
  • Fundamentals remain sound, valuations are reasonable, and most technical indicators we follow point to further potential gains ahead.

Click here to download a PDF of this report.
Following the strong 2019 rally, we ask if stocks are overdue for a pullback. The S&P 500 Index rallied 17% in 2019 and 9.4% since the December 24, 2018, low. The strength of the rally has been a surprise to many given widespread concerns about slower global growth, trade uncertainty, and the age of the bull market—which turned 10 last weekend, as we discussed here last week. Following that strong rally, a pullback is to be expected; but we don’t think it will get much worse than last week’s 2.1% drop, for reasons discussed below.

FUNDAMENTALS REMAIN SOUND

Although stocks may need a pause to digest recent gains, we continue to believe fundamentals support further gains for stocks this year. The economy is growing steadily and, despite Friday’s soft and likely weather-distorted payrolls report, is creating jobs at a solid pace for this point in the cycle. We don’t think it’s widely understood that fiscal stimulus (tax cuts and government spending) will add more to gross domestic product (GDP) in 2019 on a percentage basis than it did in 2018.
Though earnings growth is slowing, economic growth supported by fiscal stimulus, expansionary manufacturing surveys, and solid labor markets point to another year of record profits in 2019. Historically, corporate revenue is correlated with GDP plus inflation (or nominal GDP), which could approach 5% this year, if our forecasts are accurate. History also reveals that peaks in earnings growth—as we experienced in the third quarter of 2018—have tended to be followed by several years of economic growth and stock market appreciation, which should be reassuring to those who think a now 10-year-old bull market is getting fatigued.
Though nothing has been signed, a trade deal with China over the next month or two appears likely. Key players in the negotiations have expressed increasing optimism, and it’s clear President Trump wants a deal. Any agreement is probably good news for stocks at this point, but a potential rollback of tariffs put in place last year presents a possible upside surprise.
Finally, keep in mind that the post-midterm election period has historically produced strong gains—Since WWII, the S&P 500 has never been down over the 12-month period following midterm elections (18 for 18), having produced an average 14.5% gain during those periods. President Trump sees a strong stock market as part of his path to reelection, suggesting this historical pattern may hold.

MIXED TECHNICAL PICTURE

Most of our favorite technical indicators, such as market breadth, are flashing positive signals and there are a number of historical analogues pointing to more gains ahead:

  • The S&P 500 is above its upward sloping 50-day moving average (MA), suggesting an improving trend, and at support in the form of its 200-day moving average.
  • March has been the second strongest month for the stock market over the past 20 years.
  • Stocks tend to go up in the final 10 months of a year (25 out of the last 27 years) after experiencing gains during January and February.
  • Market breadth is favorable, with a high proportion of stocks participating in this year’s advance.
  • Investor flows have been negative in 2019—evidence of caution, not euphoria.
  • Investor sentiment surveys suggest bulls are not in overabundance.

At the same time, however, some indicators suggest the S&P 500 may be due for a pullback.

  • The percentage of stocks above their 50-day moving averages is still high at 84%, though down from the recent peak of 92%.
  • Put/call ratios suggest investors are complacent; more nervousness is typical ahead of rallies.
  • The S&P 500 has failed to sustain levels above the 2,800 level four times since mid-October, making a breakout more difficult.
  • Support for the S&P 500 below the 50-day moving average is at 2,650, 3.4% below Friday’s closing level.
  • The average peak-to-trough pullback after a positive January and February is 9%.

RISKS

While we do think the macro environment sets up well for stocks, we are mindful of several risks. Earnings growth has slowed quite a bit and could slow further. A potential first quarter earnings decline may fuel investor concerns about another earnings recession (not our expectation) and weigh on investor sentiment.
Though unlikely, a disorderly Brexit that creates instability in Europe is possible. The European Central Bank reminded us last week how much European economies have slowed; risk of spillover into the U.S. remains.
The latest trade headlines have been positive, but President Trump could still walk away. Even if a deal is reached, it may already be priced in and markets may sell the news.
Finally, although the Fed is on hold now, the central bank may feel the need to respond with tighter policies should economic growth improve later this year.

CONCLUSION

Putting all of that together, a 5% or so pullback may be in order. With fundamentals still sound, valuations quite reasonable (discussed here two weeks ago), and the potential catalyst of a U.S.- China trade deal, we would expect additional stock market declines beyond last week’s 2% dip to be fairly modest. Keep in mind that pullbacks of this
magnitude are typical—we tend to see three or four of them each year. Weakness may provide opportunities for suitable investors to add equities based on what we see as a generally favorable macroeconomic environment.
The possibility of a pullback does not scare us off of our 2019 year-end forecast for further stock gains from here. Although it’s reasonable to expect a pickup in volatility following the strong bounce off December lows, we maintain our 2019 year-end S&P 500 target of 3,000, or 9% above Friday’s closing level.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-830608 (Exp. 03/20)
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Main Street Sentiment At 7-Year Low | Weekly Economic Commentary | March 11, 2019 https://bradcable4.com/2019/03/12/main-street-sentiment-at-7-year-low-weekly-economic-commentary-march-11-2019/ https://bradcable4.com/2019/03/12/main-street-sentiment-at-7-year-low-weekly-economic-commentary-march-11-2019/#respond Tue, 12 Mar 2019 04:43:12 +0000 https://design1.bradcable4.com/?p=10393 The post Main Street Sentiment At 7-Year Low | Weekly Economic Commentary | March 11, 2019 appeared first on Bradley Cable Blog.

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<![CDATA[

KEY TAKEAWAYS

  • Our Beige Book Barometer has dropped to its lowest level since the 2011 European debt crisis.
  • The lower BBB reading is due more to a low level of strong words than a high level of weak words.
  • Mentions of uncertainty reached a new high amid global headwinds.

Click here to download a PDF of this report.
Pessimism has rapidly infiltrated Main Street’s outlook, according to the Federal Reserve’s (Fed) latest edition of the Beige Book. By our measure, sentiment in the March 6 Beige Book, a qualitative assessment of the domestic economy and each of the 12 Fed districts, fell to its lowest point in seven years [Figure 1]. On the surface, the Beige Book’s negative tone is striking compared to recent versions, but context around key words is especially important in this edition.

TRADE-RELATED WEAKNESS

Economic reports are important for clues on economic health and macro trends, but the Beige Book provides a window into Main Street’s perspective, offering valuable color on how larger trends are affecting U.S. businesses. In the Beige Book, the Fed presents qualitative observations made by community bankers and business owners about economic (housing, labor market, manufacturing nonresidential construction, prices, tourism, wages) and banking (lending conditions, loan demand, loan quality) conditions. The latest Beige Book, which is produced eight times a year, was compiled in the weeks before February 25 and published March 6.

At LPL Research, we maintain a straightforward but informative indicator called the Beige Book Barometer (BBB), which helps us gauge Main Street’s sentiment by looking at how frequently key words and phrases appear in the Beige Book. The overall BBB measures the difference between the number of times the word “strong” or its variants appears in each Beige Book, and the number of times the word “weak” or its variants appears. When the BBB is declining, it suggests the economy may be deteriorating; when it’s advancing, it suggests the economy is likely improving.
The BBB has fallen to 15 in March, the lowest level since October 2011 (the peak of the European debt crisis). Strong words fell by 20, while weak words climbed by 21, resulting in the biggest drop for our BBB since March 2016. In the January edition, we noted that oil districts heavily contributed to a lower BBB reading, but that wasn’t the case this time. Excluding the oil districts, the BBB dropped to 15 in March from 48 in January. Sentiment declined in 10 of 14 Fed districts, with New York, Boston, and Richmond posting the worst declines.
A broad-based decline in sentiment is of some concern, however, about half of the 34 references to weakness were concerns about traderelated subjects: global demand, agriculture, manufacturing, and port activity. These concerns are legitimate and have been reflected in economic and market data for a few months now amid the U.S.-China trade dispute. Gauges of U.S. manufacturing health fell to multiyear lows in February, the U.S. trade gap has widened notably, and agriculture prices have dropped about 20% since the first tariffs were implemented a year ago. Trade- related repercussions are clearly bleeding into Main Street’s operations, but we expect these impacts to subside once the United States and China reach an agreement. We’ve seen positive momentum on the trade front recently and resolution may come soon.
The BBB reading was also unusually low because of the low number of strong words, not because of the high number of weak words. Strong words have declined by 44 since the BBB reached a 2.5-year high in July 2018, while weak words have increased by 22 over the same period. Since 2005, the average BBB reading has been 55 when there have been 30 to 40 mentions of weakness.

INCREASING UNCERTAINTY

Main Street is also increasingly uncertain about the economic outlook. Total strong and weak words have hovered around the lowest level since 2005, while mentions of uncertainty have climbed to the highest levels in data going back to 2015. Beige Book respondents are finding it more difficult to characterize current economic conditions and set expectations, so they’re just increasingly citing uncertainty.
To us, this is a reflection of the multiple headwinds weighing on U.S. businesses, including one that has already been resolved: the most recent government shutdown. The survey period captured the second half (and the aftermath) of a historic 35-day government shutdown, which clearly dampened sentiment. The word “shutdown” appeared 22 times in the latest Beige Book, compared to the two times it showed up in the previous Beige Book. About half of the Fed districts cited the government shutdown for slowing economic activity, and Richmond, which includes D.C.-area businesses, had one of the biggest declines in sentiment among Fed districts.
Overall, we see Main Street struggling with uncertainty more than definitive signs of sustained weakness, which leads us to think this dip in sentiment is temporary. The last time the BBB reached these levels was when the U.S. economy was weathering fallout from the European debt crisis. In that period, the BBB briefly dipped below zero (in September 2011) before climbing back to a multiyear high in April 2012.

CONCLUSION

We’re in the midst of a complicated economic environment. U.S. businesses and consumers have to contend with conflicting trade and political headlines, and many recent economic reports have missed consensus estimates, some by unusually wide margins. Still, the bulk of economic data we’ve seen recently has been sound, business and consumer sentiment have started to recover, and leading indicators we track still indicate low odds of a recession. Because of this, we see lower Beige Book sentiment as a consequence of lingering uncertainty more than definitive weakness. Based on recent signals, we wouldn’t be surprised to see softer-than-expected growth at the beginning of
this year, followed by a solid rebound in economic activity once trade risk is removed.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-829893 (Exp. 03/20)

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Bull Market Reaches 10 Years | Client Letter by John Lynch | March 7, 2019 https://bradcable4.com/2019/03/08/bull-market-reaches-10-years-client-letter-by-john-lynch-march-7-2019/ https://bradcable4.com/2019/03/08/bull-market-reaches-10-years-client-letter-by-john-lynch-march-7-2019/#respond Fri, 08 Mar 2019 03:53:06 +0000 https://design1.bradcable4.com/?p=10388 The post Bull Market Reaches 10 Years | Client Letter by John Lynch | March 7, 2019 appeared first on Bradley Cable Blog.

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<![CDATA[The S&P 500 Index has staged an impressive rally after nearly entering a bear market December 24, with U.S. stocks notching their best start to a year since 1991.
Stocks have climbed the “wall of worry” once again, but global uncertainty persists as the bull market nears its tenth anniversary. While the road to new market highs could get a little bumpy as investors deal with Brexit and China trade concerns, we encourage investors to focus on the fundamentals supporting economic growth and corporate profitability in 2019.
Although recession calls have grown louder over the past several months, we’ve seen mounting evidence that this economic cycle could persevere at least through the end of 2019. The U.S. labor market remains solid, U.S. manufacturing health remains in expansionary territory, and consumer sentiment is starting to recover. Leading economic indicators suggest there’s more runway in this expansion.
A pause in monetary policy tightening may also support U.S. economic health. The Federal Reserve (Fed) has indicated that it will abstain from raising interest rates further until there is more clarity in the global environment. That message has calmed investors’ fears that continued policy tightening could eventually smother future economic growth. Inflation remains at healthy levels; however, if there are signs of wages growing too rapidly, another interest rate hike may occur, possibly in the second half of this year, to help manage inflation. Even if this happens, we believe slightly higher rates won’t derail the economic trajectory.
Corporate profit growth should also support U.S. stocks, as earnings for S&P 500 companies grew last year. While we expect the pace of corporate profit growth to moderate, we believe stock performance over the rest of this year can at least match the mid-single-digit earnings growth that we expect for the S&P 500 in 2019.
Seasonality and momentum are also on investors’sides.In 27 of the years since 1950,the S&P 500 has closed up in both January and February,and it has gained in the final 10 months of 25 out of those 27 years.
Though we have lowered some of our economic and interest rate forecasts in response to a patient Fed and slowing global growth, our overall view hasn’t wavered. We believe the pieces are in place for a continued economic expansion, and we look for stocks to power through periodic bouts of uncertainty and occasional volatility.
As always, we encourage you to contact your financial advisor if you have any questions.
Click here to download a PDF of this report.
 
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
Economic forecasts set forth may not develop as predicted.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-829339 (Exp. 03/20)

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The Bull Turns 10 | Weekly Market Commentary | March 4, 2019 https://bradcable4.com/2019/03/05/the-bull-turns-10-weekly-market-commentary-march-4-2019/ https://bradcable4.com/2019/03/05/the-bull-turns-10-weekly-market-commentary-march-4-2019/#respond Tue, 05 Mar 2019 05:10:00 +0000 https://design1.bradcable4.com/?p=10337 The post The Bull Turns 10 | Weekly Market Commentary | March 4, 2019 appeared first on Bradley Cable Blog.

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<![CDATA[

KEY TAKEAWAYS

  • During the 10-year bull market, the S&P 500 Index has more than quadrupled in value.
  • It might be the longest bull market, but the 1990s bull market saw substantially higher returns.
  • Market breadth continues to support higher equity prices and eventual new highs.

Click here to download a PDF of this report.
The bull market will celebrate its tenth birthday on March 9, 2019. During that period, the S&P 500 Index has increased more than fourfold in value, producing a total return of 410% (17.7% annualized) while rising 314% in price. Concerns over the global economy, along with a potential policy mistake by the Federal Reserve (Fed) and the trade dispute with China, all have many wondering just how much the longest bull market ever could have left in the tank. This week, we’ll show why this bull market is indeed alive and well and could make it to 11 next year.

THE LONGEST BULL, BUT…

On March 9, 2009, the S&P 500 closed at 676.53, marking the low point for the worst bear market in stocks since the Great Depression. Few believed it possible at the time, but that marked the beginning of the longest bull market, at 120 months, since World War II [Figure 1].

But while this might be the longest bull market ever, it isn’t the strongest. Stock prices in the 1990s bull market increased by 417% at the peak, morethan 100 percentage points above the current bull market. This comparison is reassuring, as it shows this bull might not be as extended as many think.
Although it may feel like this bull market has done nothing but go up for 10 straight years, that couldn’t be further from the truth. In fact, this bull market is the only one ever with two 20% or more declines based on intraday prices. In October 2011 and again in December 2018, the S&P 500 fell 20% from prior highs, only to rally by the daily close to narrowly avoid entering a bear market.
It’s worth noting that the S&P 500 hasn’t made a new high since September 20, 2018, so one could argue this bull market may have ended then. We can’t disagree, but with the S&P 500 only 5% away from making new highs, for the sake of argument, we’re going to assume this bull market is still alive and that the S&P 500 can make new highs later this year.

THREE DEVELOPMENTS

Near term, from a technical analysis perspective the stock market is clearly overbought, suggesting a break may be warranted and could come at any time. Additionally, we see potential warnings signs from put/call ratios becoming too complacent (market participants are not doing a lot of hedging against potential stock market losses) and investor sentiment polls revealing too many bulls, which makes sense after the 19% rally since December 24. Here’s the catch though: These are short-term sentiment measures—in the bigger picture, we have identified three signs that we could still be a long way from the euphoria we tend to see at major market peaks.

  • According to the Commodity Futures Trading Commission, speculators have their largest short position against the S&P 500 since November 2016.
  • According to Emerging Portfolio Fund Research, $30 billion has been pulled out of global mutual funds in 2019, even as many global stock markets have risen by double digits.
  • According to Bloomberg, 6% of all analyst ratings are sells, which is the highest level in nearly two years.

MARKET BREADTH STILL STRONG

As we discussed here last week, the underlying fundamental backdrop remains quite positive, we’re looking for earnings to potentially surprise to the upside in 2019, and we think stock valuations are still attractive relative to bonds despite this year’s gains.
Turning to market technicals, market breadth measures how many stocks are participating in moves in broader indexes. One of the easiest ways to measure this is via advance/decline (A/D) lines [Figure 2].An A/D line is a ratio of how many stocks go up versus down each day for a stock exchange or index. The thinking is, if many stocks drive broad market gains, then there are plenty of buyers and the upward trend should likely continue, all else being equal. On the other hand, if an upward move in a broad market gauge is driven by relatively few stocks, this can be a warning sign of cracks in the bull’s armor.

One sign that market breadth continues to suggest higher overall equity prices is that various A/D lines have broken out to new all-time highs this month. In fact, the NYSE Common Stock Only A/D line has a good history of leading equities higher.With that indicator making new highs currently, new highs in equity markets might not be too far away.

CONCLUSION

Despite its old age, we believe the 10-year-old bull market has quite a bit left in its tank. The ongoing benefits of fiscal policy, coupled with a more patient Fed, lead us to believe the economy may surprise to the upside in the second half of 2019. We don’t think it will be an easy ride, but we continue to expect eventual new highs in equity markets and reiterate our fair value target of 3,000 for the S&P 500, about 7% above Friday’s closing index price of 2,804.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NYSE Composite Index is a float-adjusted market-capitalization weighted index which includes all common stocks listed on the NYSE, including ADRs, REITs, and tracking stocks and listings of foreign companies. The index was recalculated to reflect a base value of 5,000 as of December 31, 2002.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-828249 (Exp. 03/20)

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An Aging Cycle | Weekly Economic Commentary | March 4, 2019 https://bradcable4.com/2019/03/05/an-aging-cycle-weekly-economic-commentary-march-4-2019/ https://bradcable4.com/2019/03/05/an-aging-cycle-weekly-economic-commentary-march-4-2019/#respond Tue, 05 Mar 2019 05:03:11 +0000 https://design1.bradcable4.com/?p=10326 The post An Aging Cycle | Weekly Economic Commentary | March 4, 2019 appeared first on Bradley Cable Blog.

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<![CDATA[

KEY TAKEAWAYS

  • The current economic expansion will become the longest ever in July.
  • Slow (but steady) growth and accommodative policy have made this expansion especially durable.
  • We still see many signals that this cycle could persevere at least through the end of 2019.

Click here to download a PDF of this report.
The tenth anniversary of the S&P 500 Index bull market is coming up on March 9. As the U.S. stock rally’s double-digit birthday nears, we’ve reflected a lot on the durability of the current economic cycle. The U.S. economic expansion is entering its 118th month, on track to become the longest recovery on record in July. Some things in life get better with age, but recession calls have grown louder recently amid heightened global uncertainty and market volatility. While it is important to be mindful of where we are in the cycle, we see a lot of evidence that this economic cycle has enough fuel left in its tank to persevere at least through the end of this year and could prove durable.

SLOW, BUT STEADY

In past economic cycles, slow but steady growth has won the race. Since 1970, cycles with annual gross domestic product (GDP) growth higher than 4% lasted about five years on average, while cycles with annual growth lower than 4% lasted about nine years on average [Figure 1]. While slow growth in this cycle has been frustrating at times, especially after a swift and painful downturn, it has helped extend the life of this cycle and keep excesses in check. Inflation-adjusted GDP has expanded an average of 2.3% annually in this cycle, the slowest pace of growth among all expansions in recent memory, and a key contributor to the expansion’s near-record age.

Steady economic growth has been helped in part by extraordinarily supportive monetary policy for much of the cycle and a cautious, gradual approach to tightening. The Federal Reserve’s (Fed) supportive policy efforts have been in place for many years, but policymakers only started increasing rates in December 2015, more than six years into the expansion. Since then, the Fed has implemented nine 25-basis point (.25%) hikes, matching the slowest Fed hiking pace in tightening cycles since 1970. This tightening cycle is one of the longest on record, yet inflation-adjusted interest rates are barely above zero. Inflation (measured by core personal consumption expenditures) has been climbing since 2015, but it’s still only hovering around the Fed’s 2% target, and wage growth, while healthy, remains manageable. Muted inflation can be attributed to several structural factors like demographics and globalization, but the Fed has played a pivotal role in promoting stable pricing while restricting growth only minimally. We believe this pragmatic and gradual approach will continue to be effective, and we see minimal chances of a policy mistake en route to a soft landing from the current modest slowdown.
The lingering effects of fiscal stimulus may also provide an extra boost to the expansion, especially if companies ramp up capital expenditures once we see a United States-China trade resolution. Supply-side fiscal stimulus can have a positive impact on output for several years as consumers and businesses reap the benefits of tax cuts and fiscal incentives.

ENCOURAGING DATA

While we’ve noted recently that coincident economic reports have sent mixed messages about economic conditions, leading economic data hint to more runway in the expansion. The Conference Board’s Leading Economic Index (LEI), composed of 10 leading economic indicators, rose 3.5% year over year in January, its 110th straight gain. Leading indicators typically show pronounced weakness as the economy approaches recession, and year-over-year growth in the gauge has turned negative an average of seven months before each recession going back to 1970 [Figure 2] . The current rate of change remains well off that mark.

Other indicators we track in our Recession Watch Dashboard also show low odds of a recession over the next 12 months. U.S. companies’ earnings growth has been solid, short-term yields have not fallen below long- term yields (known as yield curve inversion), manufacturing health is sound, market valuations are reasonable, and our sentiment indicator based on the Fed’s Beige Book report shows Main Street remains relatively upbeat. Positive signs in leading indicators and a tight job market also infer that weakness in current reports is likely related to global headwinds that have slowed but have not derailed economic momentum.

GLOBAL LIQUIDITY

We’ve highlighted how the Fed’s accommodation has supported economic growth over the past several years. However, the United States’ current economic expansion has also benefitted from a wave of central bank accommodation across the globe, thanks to a staggered global economic recovery. Balance sheets for major central banks are still around the biggest they’ve been since the financial crisis amid tepid growth internationally, and interest rates are low worldwide, incentivizing borrowing and investment. This accommodative environment (and resulting global growth potential) will likely continue to support the domestic recovery, especially as the Fed pauses on rate hikes. The Fed has also communicated that it will be flexible on reducing the size of its own balance sheet and will likely maintain a larger balance sheet compared to before the 2008 financial crisis.
Ample accommodation this late in a cycle can potentially contribute to a build-up in economic excesses. However, we have yet to see any alarming signs of late-cycle excesses or “red flags” in the economy.

CONCLUSION

While it’s important to be mindful of where we are in the economic cycle, later-cycle economies can continue to exhibit stable growth for years. We’re maintaining our positive outlook for 2019, thanks to our conviction in sound fundamentals supporting moderate economic growth. At the same time, we remain on watch for any threatening signs of slowing or excess, and we’ll continue to keep an eye on trusted economic and market signals.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-828237 (Exp. 03/20)

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Five Key Questions | Weekly Market Commentary | February 25, 2019 https://bradcable4.com/2019/02/26/five-key-questions-weekly-market-commentary-february-25-2019/ https://bradcable4.com/2019/02/26/five-key-questions-weekly-market-commentary-february-25-2019/#respond Tue, 26 Feb 2019 05:21:36 +0000 https://design1.bradcable4.com/?p=10282 The post Five Key Questions | Weekly Market Commentary | February 25, 2019 appeared first on Bradley Cable Blog.

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<![CDATA[

KEY TAKEAWAYS

  • Stocks may keep going higher, but the easy gains likely have been made.
  • Stock valuations, when compared with bond yields, are actually historically cheap.
  • The overall technical backdrop supports a continuation of the bull market.

Click here to download a PDF of this report.
This week we reassess the stock market landscape following the latest rally. Specifically, we answer five of the most common questions we’ve received recently. We use multiple lenses to assess the stock market, including fundamentals, valuations, and technical analysis.

CAN STOCKS KEEP GOING HIGHER?

Since its low on December 24, 2018, the S&P 500 Index is up 18.8% as of February 22. Gains have been driven by progress in trade negotiations and a shift in the Federal Reserve’s (Fed) communication strategy; however, extreme oversold conditions and low valuations following the worst fourth quarter for stocks since the Great Depression provided an extra boost.
Recent gains eliminated oversold conditions and pushed valuations higher, raising the bar for further gains and making the next leg higher more difficult to achieve. We still see potential for some valuation expansion should the trade dispute be resolved and steady U.S. economic growth continue, but earnings may have to do the heavy lifting to push the S&P 500 to our year-end fair value target of 3000 by December 31, 2019.

IS EARNINGS GROWTH STRONG ENOUGH TO PROPEL STOCKS HIGHER?

We believe stock performance over the rest of the year can at least match the mid-single-digit earnings growth that we expect for the S&P 500 in 2019. A little bit of valuation expansion may help, but we think earnings will be enough to get stocks back to prior highs this year (2930 on the S&P 500) and potentially to our year-end S&P 500 fair value target of 3000.
Though a lot of attention has been paid to cuts in 2019 earnings estimates due to tariffs and slower global economic growth, the U.S. economic backdrop remains solid, manufacturing activity continues to expand (based on the latest Institute for Supply Management [ISM] survey), and the consumer spending outlook is well supported by a healthy labor market.
Tariffs are the primary risk to earnings. Other risks include possible margin pressures from higher wages or another potential leg down for European economies.

HAVE STOCKS GOT TEN TOO EXPENSIVE?

We don’t think so. With the S&P 500 at a forward price-to-earnings ratio of about 16, valuations are roughly in line with the average over the past few decades. Factor in still-low interest rates and inflation, which increase equities’ attractiveness versus other asset classes like fixed income, and we would argue stocks are still attractively valued and modest valuation expansion this year is likely.
An easy way to make this point is to compare the earnings generated by stocks with bond yields, which are essentially earnings generated by bonds. We do this by comparing the earnings yield for the S&P 500 Index (S&P 500 earnings per share divided by the index price level) with the yield on the 10-year Treasury.
This statistic, referred to as the equity risk premium (ERP), is currently over 3% after averaging about 0.5% over the past six decades. Historically, a higher ERP has pointed to better future stock market performance. Since 1960, when the gap between the earnings yield and 10-year Treasury yield has been above 3% (as it is now), the S&P 500 has gained 12.4% on average over the following 12 months [Figure 1].

DO WE NEED A RETEST?

We believe a retest of the December 24, 2018, low for the S&P 500, near 2350, is unlikely. As we wrote here last week, with more than 70% of S&P 500 components recently hitting 20-day highs, we believe pullbacks in the near term will be modest.
Market breadth, which measures how many stocks are participating in the movement of broader indexes, is another positive sign. The NYSE Common Stock Only Advance/Decline line recently broke out to new all-time highs. We’ve seen time and time again that new highs in market breadth has led to eventual new highs in price.
Lastly, more than 90% of the components in the S&P 500 recently were trading above their 50-day moving average. While it may seem like stocks are overbought based on this metric, as Figure 2 shows, being overbought by this measure is actually quite bullish.

IS SENTIMENT NOW OVERLY BULLISH?

We don’t think so. As discussed last week, the overall technical backdrop continues to look strong, but one other substantial positive is that investor sentiment is still not near levels of optimism that we would consider to be a major warning sign. We use several surveys to gauge sentiment, including the AAII bull-bear survey and the CNN Money Fear and Greed Index, as well as investor flows.
History has shown that the crowd can actually be right during trends, but it also tends to be wrong at extremes. This is why sentiment can be an important contrarian indicator. If everyone who might become bearish has already sold, only buyers are left. The reverse also applies. We see this contained optimism as healthy and, in fact, are surprised there isn’t more excitement after such a powerful rally.

CONCLUSION

The questions are mounting after the significant gains since the December 24 lows. The good news is that our expectation for steady earnings growth, solid technicals, and nice valuations amid a healthy economic backdrop support further gains for stocks throughout 2019. We reiterate our year-end fair value range of 3000 for the S&P 500 from our Outlook 2019 publication.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Institute for Supply Management (ISM) Manufacturing Index is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-825770 (Exp. 02/20
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Economic Data FAQs | Weekly Economic Commentary | February 25, 2019 https://bradcable4.com/2019/02/26/economic-data-faqs-weekly-economic-commentary-february-25-2019/ https://bradcable4.com/2019/02/26/economic-data-faqs-weekly-economic-commentary-february-25-2019/#respond Tue, 26 Feb 2019 05:11:37 +0000 https://design1.bradcable4.com/?p=10274 The post Economic Data FAQs | Weekly Economic Commentary | February 25, 2019 appeared first on Bradley Cable Blog.

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KEY TAKEAWAYS

  • Recent economic data have been consistently missing consensus estimates.
  • We still see signs of sound economic fundamentals, even as some data point to weakness.
  • We expect growth to stabilize as near-term headwinds subside.

Click here to download a PDF of this report.
Investors are sifting through a deluge of backlogged data after a historic U.S. government shutdown. As data have caught up, many reports have missed consensus estimates, stoking fears that Wall Street may be overlooking a slowdown in the U.S. economy [Figure 1].

To help allay those fears, we’re addressing some questions we’ve received about the economic landscape recently, and provide our thoughts on what to look for in gauging economic health.

ARE WE NEARING A RECESSION?

We don’t expect a U.S. economic recession this year for several reasons, many of which we outlined in our Outlook 2019. The best gauge of output, though, is the U.S. consumer, as consumer spending accounts for about 70% of gross domestic product (GDP). While a healthy job market and solid wage gains are more conducive to consumer activity than at any other point in this economic cycle, a wave of negative headlines has hampered spending as of late. December’s retail sales unexpectedly fell 1.2% year over year, the worst drop since September 2009 and far below consensus estimates for 0.2% growth.
Some economists have questioned the report’s accuracy, but consumer confidence has dropped sharply over the past few months, so lower spending is somewhat warranted. Trends in retail sales have historically been tightly correlated with longer-term GDP growth, and year-over-year retail sales growth has slipped noticeably since July 2018 [Figure 2]. Since the latest retail sales report was released, consensus expectations for fourth quarter GDP have dropped to 1.5–2.5%. If GDP growth comes in at the lower end of that range, it would be the slowest quarter of growth in three years.

Slowing growth is expected this late in the cycle, and we expect GDP growth to moderate from the 3% quarterly growth we saw last year. We do expect a slower pace of growth in 2019, but we believe the odds of a recession remain low. With fiscal stimulus still in play, the government shutdown drama resolved, the Federal Reserve (Fed) on hold, and a strong rebound in equity markets, consumer spending is likely to bounce back, even if the full recovery may be delayed into the second quarter. We’ll be monitoring this week’s GDP report for more clues on the factors driving output growth.

WHAT ABOUT BUSINESSES?

U.S. companies are wrapping up another earnings season of double-digit profit growth. Business’s top- and bottom-line health appears solid, but the corporate outlook is dimming. Gauges of business optimism have declined, first-quarter profit expectations have dropped at an above-average rate, and companies have put expansion plans on hold as they wait for a resolution to global headwinds.
We’ve been especially discouraged by recent data showing tepid growth in capital expenditures, as stronger growth in business investment is crucial this late in the expansion. Higher capital investment boosts productivity, which effectively caps labor costs and helps support profit margins. The latest durable goods report showed growth in new
orders of nondefense capital goods (ex-aircraft), our best proxy for capital expenditures, unexpectedly fell 0.7% month over month. Part of the recent drop could be from waning overseas demand, which has weighed on global manufacturing, but declines in other corporate-focused reports show domestic corporate appetite has taken a hit too.
We expect business spending to pick up once corporations get more clarity on trade, helped by aspects of the Tax Cuts and Jobs Act designed to encourage business investment. However, we likely have seen peak earnings growth this cycle, and our lower GDP forecast for 2019 is partially due to muted capital expenditures in the second half of 2018.

TOO MUCH INFLATION, OR TOO LITTLE?

Inflation data have been under a microscope recently as investors have tried to reconcile evidence of a slowing global economy with cycle highs in pricing and wage growth. Financial markets’ inflation expectations have fluctuated this year after investors interpreted the Fed’s patient policy approach as a sign policymakers won’t
stifle growth by raising rates at the pace seen in 2017 and 2018. While the Fed has likely paused, we think any future rate hikes will be primarily in response to upside inflationary risks.
Data released this month showed the core Consumer Price Index (CPI) rose 2.2% year over year in January, while the core Producer Price Index (PPI) climbed 2.8%. To us, current core inflation, which strips out the impact from food and energy prices, is manageable enough that it won’t force the Fed’s hand into additional policy tightening in the near term. U.S. inflation has also been largely immune from declining inflationary pressures overseas, and we see no signs of a domestic deflationary threat. We expect slightly higher (but manageable) inflation in 2019 amid a tight U.S. labor market, a flexible Fed, and prospects for moderate output growth, especially if near-term headwinds subside. Core CPI has hovered around 2% for the bulk of this tightening cycle as quarterly GDP growth has averaged slightly above 2%, which aligns with the Fed’s 2% growth target for core personal consumption expenditures inflation.

CONCLUSION

Investors have been understandably skittish about the economic environment these days. While it has been difficult to decipher trends from the recent data deluge, the indicators we track point to sound economic fundamentals despite signs of slowing. Overall, we project 2019 GDP growth around 2.5%, a respectable pace for the tenth year of an expansion, and low odds of a recession this year.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-825867 (Exp. 02/20)
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Portfolio Compass | February 20, 2019 https://bradcable4.com/2019/02/21/portfolio-compass-february-20-2019/ https://bradcable4.com/2019/02/21/portfolio-compass-february-20-2019/#respond Thu, 21 Feb 2019 04:25:11 +0000 https://design1.lpladvisors.us/?p=9271 The post Portfolio Compass | February 20, 2019 appeared first on Bradley Cable Blog.

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COMPASS CHANGES

  • Upgraded precious metals view to neutral from negative/neutral.

INVESTMENT TAKEAWAYS

  • Expectations for solid but slower growth in the U.S. economy and corporate profits support our year-end 2019 fair value target for the S&P 500 of 3000.*
  • We maintain our slight preference for value due to attractive relative valuations after a sustained period of growth outperformance.
  • We expect a transition to large cap market leadership and away from small cap stocks in 2019 as the economic cycle ages and trade issues ease.
  • We favor emerging markets (EM) equities over developed international for their solid economic growth trajectory, favorable demographics, attractive valuations, and prospects for a U.S.-China trade agreement.
  • We favor emerging markets (EM) equities over developed international for their solid economic growth trajectory, favorable demographics, attractive valuations, and prospects for a U.S.-China trade agreement.
  • Slower but still solid economic growth and modest inflationary pressure may be headwinds for fixed income. The pause by the Federal Reserve (Fed) reduces near-term upward pressure on interest rates, but an additional hike is still possible in the second half of 2019.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment-grade corporates (IGC) and mortgage-backed securities (MBS) over Treasuries. Yield per unit of duration remains attractive for MBS while valuations and economic growth are supportive of IGCs.
  • The S&P 500 Index is off to its best start to a year since 1991, back near its 200-day moving average, and history shows that returns tend to be strong following such a start.
  • In our view, the odds of a retest of the December 2018 lows have decreased given
    the broad participation in the rally. Lower-trending bond yields remain a potential
    warning sign.


Click here to download a PDF of this report.
 
IMPORTANT DISCLOSURES
All performance referenced is historical and is no guarantee of future results.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Stock and Pooled Investment Risks
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
The prices of small and mid cap stocks are generally more volatile than large cap stocks.
Bond and Debt Equity Risks
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Alternative Risks
Event-driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.
Managed futures strategies use systematic quantitative programs to find and invest in positive and negative trends in the futures markets for financials and commodities.
Futures and forward trading is speculative, includes a high degree of risk that the anticipated market outcome may not occur, and may not be suitable for all investors.
INDEX DEFINITIONS
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Bloomberg Barclays U.S. Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
DEFINITIONS
A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession.
Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest rate risk or reward for bond prices.
Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
The simple moving average is an arithmetic moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
The Beige Book is a commonly used name for the Federal Reserve’s (Fed) report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the Federal Open Market Committee (FOMC) meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.
Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume, and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with Fundamental analysis within the decision-making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: A higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.
Beta measures a portfolio’s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark.
Idiosyncratic risk can be thought of as the factors that affect an asset such as a stock and its underlying company at the microeconomic level. Idiosyncratic risk has little or no correlation with market risk, and can therefore be substantially mitigated or eliminated from a portfolio by using adequate diversification.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-824341 (Exp. 02/20)
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Outlook 2019: Fundamental – How to Focus on What Really Matters in the Markets https://bradcable4.com/2019/02/20/outlook-2019-fundamental-how-to-focus-on-what-really-matters-in-the-markets-video/ https://bradcable4.com/2019/02/20/outlook-2019-fundamental-how-to-focus-on-what-really-matters-in-the-markets-video/#respond Wed, 20 Feb 2019 11:13:59 +0000 https://design1.lpladvisors.us/?p=9265 The post Outlook 2019: Fundamental – How to Focus on What Really Matters in the Markets appeared first on Bradley Cable Blog.

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AFTER NEARLY 10 YEARS of witnessing the U.S economy and stock market recover—and thrive—investors are starting to wonder if we’ve seen all this expansion and bull market have to offer. At LPL Research, we believe there’s more room to run, and don’t expect an impending recession or bear market in 2019.
Given we are a decade in and likely nearing the end of the cycle, however, it is a good time to start thinking about what the next phase for the economy and markets may look like. The intention here is not to start worrying or assuming the worst, but to remind ourselves that slowdowns and declines—even recessions and bear markets—are a normal part of our market cycle. And even more importantly, if we’re prepared for any downturns, we can be better positioned to weather any challenges that may be ahead.
That’s where Outlook 2019: FUNDAMENTAL comes in—because we could all a handy guide whaen it comes to this market environment. We’re here to make sure you’re prepared for what may be around the corner, or further down the line, and help you through it all.

Click here to download a PDF of this report.]]>

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Updates to Our Economic Forecasts | Weekly Economic Commentary | February 19, 2019 https://bradcable4.com/2019/02/20/updates-to-our-economic-forecasts-weekly-economic-commentary-february-19-2019/ https://bradcable4.com/2019/02/20/updates-to-our-economic-forecasts-weekly-economic-commentary-february-19-2019/#respond Wed, 20 Feb 2019 05:29:53 +0000 https://design1.lpladvisors.us/?p=9257 The post Updates to Our Economic Forecasts | Weekly Economic Commentary | February 19, 2019 appeared first on Bradley Cable Blog.

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KEY TAKEAWAYS

  • We’ve lowered our 2019 forecasts for Fed policy moves, GDP growth, and rates.
  • We expect the Fed to pause through the end of 2019 as it waits for clarity on global conditions.
  • GDP may grow at the lower end of our forecast as capital expenditures have slumped recently

Click here to download a PDF of this report.
2019 has been a busy year so far. The United States has weathered a 35-day government shutdown, global data have deteriorated further, trade headlines continue to dominate the news, and the Federal Reserve (Fed) has made a significant U-turn in monetary policy plans, all on top of the sharp market selloff in late 2018. In response to the collective impact of these events,we’ve adjusted our 2019 economic forecasts[Figure 1].

FED FORECAST

In January, policymakers removed language from the Fed’s policy statement that “some further gradual (rate) increases” would be consistent with economic conditions and added language that they would be “patient” when determining future rate adjustments. The Fed has been messaging all along that policy decisions would be data dependent, but markets were becoming increasingly concerned that the Fed was on autopilot despite a slowing global economy and tightening financial conditions. More recently, the Fed demonstrated its commitment to flexibility, and it will likely pause on further rate tightening as the world waits for greater clarity on global conditions.
We’ve long emphasized our faith in the Fed’s commitment to flexibility and said in our Outlook 2019 that policymakers likely would not be as aggressive in 2019 as investors have feared. Based on recent Fed commentary, we expect the Fed’s pause to continue through the end of 2019. The Fed may need to briefly pump the brakes with an additional rate hike, potentially in the second half of this year, if business investment rebounds, the labor market tightens further,and economic growth picks up. To be clear, we think the U.S. economy could digest another rate hike, and it would be prudent to increase rates if there were signs of excesses or overheating. However, the Fed must consider global stability in its monetary policy moves, as an accelerating U.S. dollar could disrupt trade further and curb growth in struggling economies internationally.
Recently, the Fed has also messaged flexibility in the pace of balance sheet runoff, which is likely to calm investors’ nerves. No official changes have been made yet, and we don’t expect any in the near term. Further balance sheet reduction still gives policymakers a more subtle tool to influence interest rates, helping to provide some tightening while hikes remain on hold. Despite continued balance sheet runoff, global liquidity remains more than adequate, and the impact on global markets should be modest.

GDP FORECAST

We see enough evidence to think 2019 gross domestic product (GDP) growth is likely to be closer to the lower end of our original 2019 forecast with risks balanced to the upside and downside. Heightened trade and political uncertainty have clearly weighed on corporate and consumer sentiment, and capital expenditures growth stalled in the second half of 2018 as U.S. corporations waited for greater clarity on trade risk before investing in their businesses. Growth in capital spending, measured by new orders of non defense capital goods (ex-aircraft) slowed through November, so we wouldn’t be surprised to see tepid business investment weigh on last quarter’s output. December’s historic slide in retail sales points to fourth quarter weakness in consumer spending as well. Control- roup retail sales, which are used to calculate GDP, decreased 1.7% in the month, the worst drop since September 2001. Fourth quarter GDP data are scheduled to be released February 28, with the consensus predicting from 1.5% to 2.5% growth.
As we mentioned in Outlook 2019, we still believe stronger growth in business spending may drive this leg of the economic expansion, as higher investment leads to greater worker productivity and profit growth. However, spending growth will likely be muted until the trade dispute with China is resolved.

INFLATION FORECAST

We believe U.S. inflation will remain manageable, even as domestic growth slows and the Fed pauses. We predict the core Consumer Price Index (CPI), which excludes food and energy components, will rise 2.25–2.5% year over year in 2019, consistent with our Outlook view. The pace of yearover-year core CPI growth has been about 25–50 basis points (0.25–0.50%) higher than growth in core personal consumption expenditures (PCE) this cycle. Therefore, if we trust the Fed’s ability to target roughly 2% core PCE growth, we would expect core CPI growth to be slightly above 2.25%.
Core CPI growth of 2.5% would be the fastest pace of price growth in the economic cycle, just above the 2.4% growth in July 2018. However, we think a slight increase in inflation would make sense given the firm U.S. labor market and the possibility that economic activity could stabilize after trade headwinds subside. If price growth does hold steady near 2.5%, we don’t expect inflation to significantly curb the domestic economy. Slowing global economic growth should cap U.S. price growth, and the Fed has room to adjust rates if inflationary threats emerge.
To us, wage growth is an important indicator of overall inflationary pressures, as wages constitute about 70% of business costs. Average hourly earnings for nonsupervisory workers have climbed as much as 3.5% year over year recently, but are still well below the 4% often seen late in the economic cycle. We don’t expect much upside in wage growth from these levels given the long-term structural forces driving the labor market right now, such as globalization and age demographics.

RATE FORECAST

Given our lower expectations for U.S. GDP and deteriorating global conditions this year, we expect the 10-year U.S. Treasury yield to trade in a range of 3–3.25% at the end of 2019. Our forecast implies about 30–50 basis points (0.30–0.50%) of upside from the 10-year yield’s current levels, due to accelerating inflation and still solid domestic growth prospects. U.S. government debt is attractively valued relative to other sovereign debt, so we expect global interest in Treasuries to counteract any further appreciation in longer-term yields.

CONCLUSION

We’re in a complicated environment right now, and uncertainty around global headwinds has roiled many economists’ predictions (including ours). Even though we’ve adjusted a few forecasts, our overall belief that the U.S. economy is on solid footing hasn’t wavered. We don’t expect a recession in 2019, and we have yet to see the red flags that in the past have signaled a large increase in recession risk.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Any economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
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