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Jim Kniffen’s Current Market Assessment as of June 14, 2018Submitted by Townsend Asset Management Corp. on June 14th, 2018
My current assessment:
Following the strong uptrend crescendo in January, the US and international stock markets experienced a period of volatility. When this began, I was mildly concerned that it might be the beginning of a reversal. However, the volatility seems to have subsided. The market “consolidated” or paused to digest recent gains and now appears to be headed up again. The downtrend never really happened.
The market continues to enjoy support from economic growth, corporate earnings and job growth. The tax law change is having a positive effect on many aspects of our economy. Rising interest rates are having a negative effect on bonds. However, rising rates are also strengthening the US dollar. This creates headwinds for international investments, as well as dividend focused US investments. Also, we see small company stocks generally outperforming larger company stocks. Small company stocks do better when the US economy is doing very well. Large company stocks face headwinds for their international business segments.
The weaker areas of the market are bonds, utilities, REIT’s, value (dividend) stocks and international stocks and bonds.
I continue to caution my clients against relying too heavily on bonds to reduce risk and volatility in their portfolios. Falling rates over the last 30 years have given a boost to bond performance. However, in a period of rising rates, bonds will lose value. As an alternative, we have shifted to more “floating rate” bonds that do well as rates rise. Also, since stocks (and the economy) are doing well presently, a little more exposure to the right stocks is probably a good thing. Of course, we want to remain vigilant in our awareness of market forces and trends because they will change at some point.
1. Major economic indicators: Employment, Industrial Production, Real Sales, and Real Income. There are many others, but these are the ones that matter most. These four indicators are the driving forces behind economic growth and all are currently trending up. Trailing one-year US GDP in the first quarter of 2018 was $19.957 Trillion. This is 4.7% higher than the same number in the first quarter of 2017. GDP growth is generally reported to be around 3.5% to 4%. Very strong!
2. The Index of Leading Indicators continues to post favorable numbers. Though it’s been a while since we had a recession, this metric is not pointing to a recession anytime soon.
3. Corporate Earnings continue their strong uptrend (black line). You can see the slight pullback and resumption of uptrend in stocks (red line).
4. The Major Market Trend is still headed up almost without even noticing the recent market volatility. Notice the blue line never dipped below the red line. This shows that the short-term volatility we saw in February and March was not enough to upset the long-term uptrend.
5. Interest Rates – Yes, rates are heading up. If you don’t adjust your bond portfolio accordingly, you are likely to experience disappointing performance on the “safe” side of your portfolio. On the other hand, consider why interest rates are rising. It is largely because the economy is humming along, and jobs are plentiful. This chart does not reflect the hike in interest rates earlier this week or the two more rate hikes we are likely to see later this year at the Federal Reserve.
6. Market segment comparison:
- Growth stocks are outperforming value stocks.
- Small stocks are outperforming large stocks.
- US stocks are outperforming international stocks.
- Stocks are outperforming bonds.
7. General portfolio adjustments:
- Overweight Growth vs. Value
- Invest a little more heavily in small US stocks.
- Reduce international exposure.
- Reduce bond exposure and shift toward floating rate corporate bonds.
Application to client accounts:
These major forces and indicators provide portfolio management guidance at a very high level. I engage in ongoing deeper analysis to compare performance trends in many different areas of the market to identify areas of opportunity or concern. In each area of the market where I am seeking to invest, I compare available investment vehicles – mostly exchange traded funds (ETF’s) and mutual funds to select those that I believe offer the most persistent superior performance, with a keen eye on expenses. It is common for different accounts I manage to hold similar investments in similar portions. However, each client portfolio is constructed with the owner’s unique investment perspective, liquidity needs and tax structure in mind. Every client account is uniquely held in that client’s name at one of our well-known custodians – most frequently Charles Schwab. I manage these accounts on a “fee-only” basis in a fiduciary relationship wherein I am committed to the highest and best interest of my clients at all times.
One quick note on politics:
Politics and markets are inextricably linked. However, as an investment manager, I adhere to the premise that markets may not reflect a person’s view of the current political environment, but that is not important. What is important is the evidence provided by the markets. We must observe and follow the market trends. One should always be wary of changes in market trends, but until a trend changes - it continues!
About Jim Kniffen
Jim Kniffen, CFP is a Senior Investment Advisor at Townsend Asset Management Corp. a Registered Investment Advisory firm located in Raleigh, North Carolina offering comprehensive wealth management expertise and service to its clients. Email Jim@assetmgr.com