August 2018

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Kevin Coyle: Greetings. Kevin Coyle, John Finley, Augusts 2018 update. Markets have almost recovered to their January of 2018 peaks.

John Finley: We're up 7 1/2% overall in the U.S., and that's led by large cap growth companies again. Tech's up 12% this year, large cap growth companies up over 10%. Internationally, the story's not so good, down slightly negative in international developed and emerging markets.Kevin Coyle: So total return portfolio with some international emerging markets, bonds, and some of the tech, then you should be up around 2 to 3% so far this year. The earnings backdrop?

John Finley: Earnings are strong. They're still, with 80% of the companies reporting, over 25% increase in earnings per share. Top line growth is good, year over year over 9% for S&P 500 companies.

Kevin Coyle: So a lot of the talk has been this rally has been for so long, and the yield curve is bordering on inverting, with the short term being at 2 1/4%, the 10 year bond being around 3%. So even though people have been worrying about inflation, the bond market seems to be saying something different.

John Finley: Yeah, we've got the Fed on one end, raising rates because of a fear of overheating economy, and inflation but they're doing it in a measured way. We expect them to raise two more times to bring the Fed funds rate up around 2 1/2%. The investors at the long end of the treasury curve however, the reason I think that the yields are still so low is that they're not convinced in that continuing growth story or that potential inflation story.

Kevin Coyle: Now whether that leads to a recession remains to be seen. But with the global backdrop and generally the sentiment as well as corporate management seems to be positive as we move going forward. Tariffs?

John Finley: Well, that's the big news item this year. It's creating a lot of volatility and uncertainty in the markets. Although the stock market so far in the U.S. has been kind of shrugging that off-

Kevin Coyle: In earnings calls, management has been expressing that they felt that it's not material issue as well as that prices could be passed through.

John Finley: Right. So, what will yet to be seen is a lot of saber rattling in the international arena, between the Trump administration and these other countries, especially China, which has considerably more to lose in a trade war-

Kevin Coyle: Well, they export $500 billion to us and we export $175 billion to them. So they would seem to have more skin in the game, put this all together, cautiously optimistic as we move forward.

John Finley: Right. I agree with that.

Kevin Coyle: Midterm elections coming up. Summer in its last month, seems like summer is ending on August 1st these days, is a bit depressing but it beats subzero temperatures. Until our next update, see you in September, October.