Many commentators and market watchers seem a bit confused watching stock markets around the world continue to grow. For those watching the geopolitical gamesmanship taking place, along with other concerning news items, the world appears gloomy, but looking past headlines to the fundamentals seems to paint a much different picture. Simply put, stocks do well when economies are growing, when central banks are accommodative, when companies are making money, and when inflation is low and fairly stable. These conditions are the backdrop today, with all major regions posting earnings-per-share growth of more than 10% for the first time since 2005 (excluding the post-crisis bounce). Every major country in the developed and developing economies of the world posted expansion in their Purchasing Managers Index (PMI) for Manufacturing ending Sept. 30th. While the “Chicken Little” inside all of us is always looking for signs of the next market drop, we must also, at the same time, be aware of the conditions that make markets grow. Investor sentiment has clearly shifted in the past year to the positive, though we should not allow ourselves to be completely enamored with this positive climate and must remember to keep a watchful eye since conditions are always subject to change.
As we stated over the last two quarters, the U.S. economy is still fairly strong with the jobs picture, wages, and business activity still holding steady. Optimism regarding tax reform, deregulation, and healthcare reform have provided some fuel pushing markets higher, especially for smaller companies, but these changes have still not come to fruition and therefore should be viewed as a source of risk. Recent hurricane-related storms have displaced people and businesses. The emotional toll has been great, but the economic impact is a bit mixed in the short-run as rebuilding is economically the same as building. Because of this, the stock market reaction has been nominal. With the U.S. dollar weakening and energy sector earnings back positive, the S&P earnings have been growing and pushing markets higher. It should be noted that U.S. stocks have moved into “expensive” territory and, with such strong recent price growth, the ability to achieve similar returns in the long term might be more difficult. The S&P 500 was up 14.24% thru September 29th, while the Russell 2000, representing small companies, was up 10.94%.
The market optimism has not just been in the U.S. but has spread around the globe, with developed international stocks soaring thus far this year. Two factors have contributed to these high returns. First, the U.S. dollar has declined (which adds return to international investments). Through the end of September, this has added approximately 9% to international returns for U.S. investors. Secondly, Europe has been growing. With increased earnings and lower stock valuations, investors have seen this as an attractive opportunity and have been willing to bid up prices. While high double-digit growth is unsustainable over the long-run, it is not impossible for it to persist in the short-run while international stocks “catch-up” to their U.S. counterparts. The EAFE index was up 19.96% through the end of the quarter.
Emerging Market Stocks
What is true for developed international stocks is more true for emerging market stocks. The Emerging Market index is up 27.78% thru September 29, 2017. While we have enjoyed this robust growth, we also recognize that it comes with increased volatility and therefore limit our positions in emerging markets. As I often say, “emerging market stocks are like salt; in the right quantities, they can add a great deal of flavor to a portfolio, but if you add too much, you might just spoil your meal!”
The Federal Reserve carefully watches employment, inflation, and, much more recently, global markets and other central banks, as it attempts to keep the economy in a “Goldilocks” environment of “not too hot and not too cold.” The U.S. economy has continued to grow and inflation has been very low, allowing the Fed to slowly raise rates with little fanfare. The U.S. Aggregate Bond Index is up 3.14%. High yield bonds have remained resilient and returned 6.22% thus far.
Enjoy Good Times
I often describe stock returns as “lumpy” in that, while they may average a certain amount over time, the month-to-month or year-to-year investor experience is rarely near that average; it combines good returns with bad. We should enjoy this somewhat rare time when markets around the globe are all in solidly positive positions but must also understand that this doesn’t mean that “it’s different this time”. We will likely get our lumps at some point. We are thankful to see diversification come back into favor, with diversified stock portfolios having benefitted investors not only in risk reduction but also in actual increased returns. Diversification, maintaining emotional discipline, and keeping a watchful eye on market conditions will continue to be our way going forward. We thank you for your trusting us as a steward of your capital and for allowing us to be a part of your financial life.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of Oct. 10, 2017, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Bridgeworth, LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks.
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