The choppy markets of 2018 continued to move higher in July as investors reacted to the news of the day.  The headwinds were generally self-induced as Washington rolled out more tariffs in an effort to deliver a world with fewer tariffs.  The final answer here is unknown, but any long-term improvement to free and fair trade will not come without some short-term pain.  The market is handicapping this on the fly, and the days when we saw corrections seemed to correlate with escalating fears of expanding the trade wars.  The tailwinds pushing the market upward, on the other hand, have been a result of strong corporate earnings or positive economic data.

This ebb and flow of positive and negative information is evident as the second quarter earnings season hit full stride in late July.  Two of the FANG stocks were severely punished when earnings and outlooks for Netflix and Facebook fell well short of expectations. As a group, the FANG stocks are down 10% from their June highs.  On the flip side, other companies like Coca Cola, Caterpillar, Pfizer, Apple and Datawatch posted great financial results and shareholders were rewarded.  On the economic front, the U.S. generated a 4.1% GDP growth number in the second quarter which is beginning to reflect the positive effects on our economy of tax cuts, reduced regulations and a confident consumer.

Stocks had their best month since January.  International stocks, emerging markets and the U.S. stock markets all posted healthy gains for the month. The two major international indices (MSCI Emerging Markets and MSCI EAFE) were up 2.20% and 2.46%, respectively, in July.  The much followed S&P 500 gained 3.72% while the Dow Jones Industrial Average posted an impressive 4.83% return for the month.  The technology and biotechnology focused NASDAQ Composite added 2.19% as the FANG correction weighed on the index.

In the bond market, prices fell slightly after the benchmark 10-Year U.S. Treasury yield began a move back up toward the magic 3.0% point.  The benchmark 10-Year U.S. Treasury yield moved up 11 basis points to yield 2.96%. The yield curve continued to flatten: the 2-Year Treasury rose by 15 basis points to end the month yielding 2.67%, and the 30-Year Treasury rose 10 basis point to 2.98%.  While interest rates on longer term bonds are still low by historical standards, the short end of the yield curve is beginning to offer value as the 2-Year Treasury approaches 3.00%.  We still believe owning fixed income securities in your portfolio will not hurt you, nor will they help your assets grow. Their value will either be an insurance policy against a stock market correction or a source of liquidity, income or price stability.

Expect heightened volatility to continue as we move down the road on trade and into the heat of the mid-term elections.  Politics, elections, tweets and rhetoric are background noise which needs to be toned down.  Earnings, valuation and economic results will shape the degree of volatility and the direction of the market.  The latter are fundamentals which we monitor closely and ultimately drive long-term price movements.  Our current market optimism comes from the solid fundamentals of strong earnings and economic growth.  Stay invested and focus on the fundamentals, not the noise.

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

One of the long term secular themes in the market over the past 10 years has been the steady rise of E-Commerce as part of US consumer spending habits. The below chart shows the consistent increase in market share of E-Commerce as a percent of total retail share.

E-Commerce share has risen from just under 4% of total sales in 2008 to over 9% in Q1 2018. Considering total retail sales was $5.2 Trillion over the last 12 months, this growth of market share in E-Commerce represents a very large dollar figure.

Also, the below chart reflects the growth of E-Commerce from Q1 2012 through Q4 2017. The yellow line shows that E-Commerce sales have grown between 12% and 17%, which is significantly faster than the 1-7% range of growth for total sales during the same period. The data clearly reflects the consumer preference to spend more of their discretionary dollars online.

Finally, the chart below indicates the estimated market share growth of E-Commerce to total retail sales out to 2021. It reflects that the share gain of E-Commerce is likely to continue as new firms enter the market, existing firms transition more business to their online platforms, and existing players continue to grow faster than the overall market.

We have already witnessed some of the ramifications of this trend within several companies and industries. Whether that has been the significant rise of Amazon, the strategic changes and acquisitions going on at Wal-Mart, or the difficult market environment for several physical retailers in industries like retail apparel, electronics, and bookstores. Logistics providers, like UPS and FedEx, have had to adjust to increasing volumes but changing price dynamics and capital needs for their businesses. Pharmacy companies, like CVS and Walgreens, have had to face a more uncertain future as mail/online pharmacies create the opportunity for much greater competition. Even companies like REITs have to understand E-Commerce trends and how it affects their existing and future clients and their changing real estate needs.

By all indications, E-Commerce is a trend that is here to stay. How companies provide value through multiple channels will be a significant indicator of their future potential and growth opportunities. Selecting investments, especially within those sectors affected by E-Commerce trends, will rely on finding business models that can survive and thrive as a result of the changing landscape.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Headlines in the second quarter kept market volatility elevated. The market moving headlines covered a wide range of economic and political topics. First quarter corporate earnings reported this quarter were outstanding. The Federal Reserve raised short-term interest rates by 0.25% as expected and projected two more rate hikes this year. The contentious G-7 meeting put trade and tariff disputes back in the limelight. China retaliated in response to the U.S. tariffs, and Trump threatened to double down on China. The North Korean summit calmed fears of a potential nuclear showdown. The court decision on the AT&T/Time Warner merger came down clearing the way for a takeover without conditions. Unemployment rates hit historic lows as the economy continued to move upward.

The third quarter will have its own version of breaking news which the market will need to sort out. Obviously second quarter corporate earnings growth will be closely watched, tariffs will be monitored and the mid-term elections will begin to take center stage. News happens, but markets generally move according to fundamental factors of earnings, valuation and economic activity. It’s from these fronts that our market optimism lives. Consumers with jobs and confidence are a powerful economic force. Couple this with lower taxes, less government regulation, strong corporate profits and low interest rates and you have a recipe for future prosperity.

After a tenuous first quarter, the global stock markets produced mixed results. On the winning side: U.S. stocks proved superior to international stocks and emerging markets, small and mid-sized U.S. companies outpaced large capitalization multinational companies, and growth companies outperformed value. After nine consecutive positive return quarters, the Dow Jones Industrial Average posted a negative return in the first quarter, but began a new winning streak in quarter two. An eight day losing streak near the end of the quarter downsized the results in the second quarter, but the index stilled managed a 1.26% gain. In addition to the Dow, the NASDAQ Composite gained 6.61% and the S&P 500 increased 3.71% this quarter. International stocks did not fare as well with potential tariffs looming. The two major international indices (MSCI Emerging Markets and MSCI EAFE) were down 7.96% and 1.24%, respectively, for the quarter.

In the bond market, prices rallied after the benchmark 10-Year U.S. Treasury bounced off a 3.11% high yield and returned to its comfort zone in the high two percent range, but still left interest rates higher for the quarter. The benchmark 10-Year U.S. Treasury yield moved up 11 basis points to yield 2.85%. The yield curve continued to flatten. The 2-Year Treasury rose by 25 basis points to end the quarter yielding 2.52%, and the 30-Year Treasury rose just one basis point to 2.98%. Owning bonds in your portfolio will not hurt you, nor will they help your assets grow. Their value will either be an insurance policy against a stock market correction or a source of liquidity and price stability.

Unfortunately, long-term investing does not result in values moving in a straight line higher. The market and portfolios go through periods of varying performance. The best defense against market volatility is proper diversification. Structure your portfolio for multiple objectives (growth, income and principal preservation) in allocated amounts that align with your risk tolerance and long-term financial goals. The right asset allocation allows your portfolio to weather all environments and will keep you invested for the long haul.

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222