The lazy, hazy, crazy days of summer are upon us. Stocks have meandered higher while bond yields have drifted lower. The SPX is now 2822 or 1.8% below it's all time January 26th high of 2872. The U.S. economy is strengthening despite the fact we are in the 10th year of economic expansion. Unemployment is near an 18-year low, credit is readily available, consumer confidence is high. No recession is on the horizon. 

Second quarter earnings season is wrapping up with 91% of the S&P 500 having reported quarterly results.

  • Second quarter EPS are up 25% with sales up 10%. Expectations were for 20% EPS growth with sales up 8.4% heading in to the reporting season, this is roughly in-line with the modest upside we typically see relative to Wall Street estimates.
  • Third quarter EPS are expected to grow 20% with sales up 7.2%, in-line with estimates one month ago. Estimates for the following quarter normally get pared down bit based on conservative guidance.
  • For the year, EPS are expected to grow 20.6% with sales up 8%, marginally higher than one month ago.

The clouds in this pretty picture include the effect of widening tariffs, the upcoming midterm elections, the Mueller probe continuing without solution and increasing tensions with Turkey, Iran, N. Korea, Russia and China.

Additionally, we have a narrowing difference in 2 and 10-year Treasury yield spread. The 2 yr. -2.61%, 10 year- 2.88%. The Fed is expected to raise rates 2 more times this year and next. This may lead to an inverted yield curve, signaling a future recession. 

The U.S. dollar has strengthened across the board hurting returns from foreign investments and slowing earnings growth from U.S. multinationals. $DXY the trade weighted U.S dollar index is up nearly 5% this year and at a 52-week high as tariffs exacted on foreign trading partners has driven investors to keep their investments closer to home.

As markets work their way through summer doldrums, U.S. stocks have advanced while foreign markets swoon, particularly in China.

Gold trades at a new 52 week low. EEM-$42.48, the emerging markets ETF is not far off 52-week lows and 18% off its Jan 26 highs.

Value stocks have underperformed again in 2018. Growth stocks have far outperformed Value this entire market cycle.

U.S. stocks continue to outperform bonds. AGG -$106.29, the iShares Core U.S. Aggregate Bond fund is down 1.12% year to date, IVV -$284.11, iShares Core S&P 500 ETF is up 5.7%.

We shall see what the balance of 2018 has in store. It takes time to unravel a long bull run and time is always on the side of long term investors. With low inflation, low interest rates and rising earnings the bull trend has the support to continue. If the trade wars worsen however, the positive economic climate will change across the globe. If this trade war ends and leads to lower tariffs stock markets everywhere will likely rise.

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Disclaimer: These stock market observations are confidential and proprietary. They are for informational purposes only and are not intended to be used, and may not be used, as investment, legal, accounting, tax, or other advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the information herein is no longer current or accurate. These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests in any investment vehicles managed by CFA or an associated person or entity, or to provide investment advisory services.