Technician's Corner
At the start of each new quarter I spend a few days looking over the charts to see what stands out, to either get confirmation of what I currently believe, or find evidence contradicting my current stance. As you know I’m not much of a technician (study of charts) preferring to focus my time on the fundamentals, but as in business receive all the advice you can before ultimately making your decision.
Here is an overview of some charts that have caught my attention over last week.
The Economy
GDP
Real GDP Year over Year to the end of the 2nd quarter is what can be classified as a surge. Real GDP is close to 3% which is the highest we have seen for three years according to JP Morgan Asset Management. A lot of this can be equated to fiscal stimulus including tax cuts, which has helped spending by both the consumer and corporations. I think this can be maintained for another year, however some tightening by the fed may slow the limit of growth after 2019, and we get back to 2%. Don’t worry—we can live in 2% economy.
Unemployment
Source: Raymond James (Gleanings)
Unemployment is now at 3.75, which is the lowest level of month over month since December of 1969. Looking forward I believe that unemployment may even get down to 3%, however, that’s not a figure that can be maintained, and we will ultimately get back to 4%. This could be the first time that I can ever recall that economic growth may be stalled not by lack of demand, but lack of workers. Wage growth has not yet started to impact inflation or a slowing of the GDP growth as you’ll see from the chart below.
Stock Markets
Corporate Earnings
My favorite statistic to review. A stellar year over year and I’ve seen predictions for 2018 to be as good as 25% over the 2017. A reduction in corporate taxes from 35% to 21% has made a meaningful impact. S&P 500 2018 earnings according to Raymond James is $157 per share and close to $175 in 2019. As we get through the first 12 months of tax reform earnings are expected to grow in the single digits.
Multiples
Always the fun part of putting a fair valuation on a stock market is how many times earnings is reasonable. As I’ve stated several times previously, I feel that P/E ratios should be higher given the much bigger bias to growth stocks in the index compared with value stocks compared to 25 years ago. When I show you the chart below you must take into consideration that this chart at the end of 2016 showed the average P/E dating back 25 years was 15.8 times earnings. My very poor drawing attempts to show you that I expect this long-term average to continue to rise. Hopefully by next week I can give you a chart dating back 10 years to give you a better visual as to what P/Es have been doing. However, for this chart I want you to notice that we are back to 25-year average after Q1 this year, which I think is undervalued.
Market Returns
I’ve always argued that corporations will figure out a way to make money no matter what the fiscal situation is on any one country. They just need to know what the playing field looks like. Tax reform was welcome news to CEOs as they had some certainty on how much of their profits would be given to the tax man compared to how much they had to reinvest. Current trade disputes bring us back to the same issue of uncertainty and tend to keep us range bound, as the chart below shows. I do believe that we will get through this before year end removing some of the barriers to enable the market to break through this range.
Fixed Income
Treasury Yields
Although it may not have felt like it, interest rates have increased since the start of the year across the board, although the most move is on the short end which is controlled by the Fed. The first chart shows the year to date change in yields and the second chart is the end of 2014. Looking forward the expectations are for two more rate rises by the fed this year and another 3 next year. That’s an additional 1.25 % to short term rates. I expect longer term rates to start to move closer in step with shorter term than it has in the past.
Source: Treasury.gov
Source: Treasury.gov
International Investing
When thinking about international investing you can generally categorize overseas markets as developed or emerging. Since the current expansion began the U.S. markets have outperformed international markets, however I have been getting interested given some attractive valuations compared to U.S. markets. I also feel that the current trade disputes will hurt both developed and emerging international markets more than the U.S. and any resolution could present a nice opportunity.
Here is the buy/sell for this week.
Source: MG&A
As always please feel free to call with any questions.
Opinions expressed are those of Mick Graham and are not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. It has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no assurance any of the trends mentioned will continue or forecasts will occur. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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