Video Newsletters: Insights and Observations

Everything listed under: 2019

  • August 2019

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    Kevin: Greetings. August 7th, 2019 market update. A little bit of a fun in the last week John?

    John: Volatility is back. We saw it in May, we're seeing it again now in reaction to the latest news from tariffs and our trade relationship with China.

    Kevin: So the market's down about 6% from the peaks over the last week. We had a similar kind of a decline in May, correct?

    John: Right.

    Kevin: Mostly related to tariffs in the China dispute. You know, just to put things in context , I mean the market being down 19% fourth quarter of 2018, we had a nice run up and through July of 20% or so. Volatility is back. Volatility normally comes from uncertainty. Correct?

    John: Right, right. And there is always going to be uncertainty, but markets tend to overreact. But it seems like the backdrop now is a little bit more, I would say cautious, look what the Fed did cutting interest rates and that was an “insurance measure” on their part to help sustain the expansion in the U.S.

    Kevin: So the bond market, if we turn to that for a second, you have another decline in the 10 year treasury. You have short-term rates in some circumstances being below the longer term rates. Oftentimes they say that's a predictor of recession, but a lot of that might have to do with currency flows, and negative interest rates in Europe, and money trying to find a place where it's getting a positive yield.

    John: Well, I also think it's a “fear trade” as well. I mean there's a flight to quality that drives bond prices up and yields down, so we're definitely seeing that now too.

    Kevin: Well you put that all together and you say, where are we at in terms of the economy in terms of earnings?

    John: Well, we're looking for a 2% of real growth in the U.S., which is subpar, but earnings were great last year related to the tax cuts. So now we're seeing year over year quarterly earnings on the S&P 500 maybe down 1%.

    Kevin: The market seems to be digesting that reasonably well in terms of understanding that comparison.

    John: Right.

    Kevin: So we're still really in the range of long-term PE ratios if you feel that the earnings are sustainable. Just putting it all together is there is a heightened risk, there is uncertainty. You've got things like Brexit. You have the economy having a prolonged expansion here, which people keep thinking it's going to end ultimately. But there doesn't seem to be any egregious signs of excess, but there's areas of concern or uncertainty which cause more volatility. And like we said before, in line with your overall objectives, it's a reasonable time to be reducing risk if you feel appropriate according to your needs.

    John: Well, there's also the backdrop of a slowdown in global growth, China in particular, so markets are watching that situation very closely. But I think businesses, business sentiment is also waiting to see how this is all going to play out before they make additional investments.

    Kevin: Right. So it's like cautious and patient kind of a sentiment, really.

    John: Yeah. Well, there are good things happening. Of course unemployment is very low. We have more people participating in the job market in the U.S. That's a backward looking indicator, but still pretty healthy. So we've got some good signs still out there that may be supportive of the market going forward, but certainly these clouds are beginning to develop.

    Kevin: Well then you got to go back. So the market will decline at some point in time for some reason, you know? The last one we had was over a 50% decline in 2007. It took five years and change for it to get back to its peak. Hopefully we're not looking at something like that. I don't think the comparisons really ring true in terms of the amount of leverage and debt in the system. But, as long-term investors, going back to our earlier point, is to be aligned with what you need to do. Have the appropriate risk on the table, any appropriate risk off. This kind of thing is going to be a discussion we're going to have on an ongoing basis for the rest of our careers, anyway. Until next time, enjoy.

  • May 2019

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    Kevin: Greetings. May 8, 2019, Market Update. A bit of a change since our last update in February. John maybe retrace our steps, fourth quarter of 2018 to now.

    John: Well, fourth quarter was ugly. We had the market's down almost 20%, but we're seeing a nice bounce back so far this year, almost 16% through yesterday. So that's being led by again, growth and, in this case a little bit more small cap, mid cap, than large cap, but still a growth story.

    Kevin: You have international behaving a little bit better, some signs of improvement there. But so we're 2% below the all time highs now, which was what established recently, 10 years or so, just about near the longest expansion ever. A lot of people will say that that's cause for concern. Just because it's an old rally, does it mean that we're at the final hour? Or what are the positive signs you still see out there?

    John: While I'm comfortable saying that we're in late stage of the cycle, but who's the say when the cycle's going to end? There's plenty of things underpinning the market that could cause us to think that it may have legs for a little bit longer.

    Kevin: Well, the feds backed off, so the market likes that. Volatility is decreased because of that. Earnings have been positive. Valuations, at least if you believe that the earnings are sustainable, are reasonable.

    John: Well, most stocks, except for the ones that have been leading the market, most stocks are down about 13% on average from their 52 week high. So it's still a pretty much a large cap growth tech story, that's been driving the market.

    Kevin: So you do have a concentrated rally still here and a slower growth environment, which we've had since 2007. That's normally the types of stocks that are going to behave better, are the stocks that have more visible earnings growth. But then you have more of your value plays, stocks that some of the stock managers we talk to where they are actually seeing valuations that are attracted to them.

    John: Right. Well, and from an economic perspective, we've got very strong employment, which is good when consumer's continuing to spend. That's also another supportive factor. There's plenty of things we can point to as being potential headline risk, certainly the tariff situation, Brexit, China, you name it.

    Kevin: Well, interest rates, wage inflation, things of that nature.

    John: Yes.

    Kevin: But in the meantime, steady as she goes. Well, you've talked about those risks and I think and as you go forward, certainly it's not a bad time if you need liquidity in the near future is trimming from the areas that have been going up and or adding to areas that have not been participating as much. My hindsight's 20/20, it's my foresight I have trouble with. And without further ado, I guess we'll hopefully see some warmer weather in Chicago and we'll be talking to you in August.

  • February 2019

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    Kevin: Greetings. John Finley, Kevin Coyle, February 6th market update. So we had a nice fun Christmas present Christmas Eve and since then there's been a bit of a change. John, a little bit of comment of fourth quarter and year-to-date market?

    John: Christmas Eve was the low point of the stock market since the all time high back on September 20th. We're down almost 20%. Since that time till now, we've recovered about 60% of that value back, and now it's more of the small cap stocks that are leading the way.

    Kevin: So you have more of a risk on. So it seems like the appetite for risk, high yield, small cap, emerging markets. The earnings backdrop, the economy?

    John: Economy's strong. We have still very strong employment situation. Hourly earnings are up over 3%. That's good for consumer spending. Maybe not so good for earnings for companies because now their margins are going to be squeezed a little bit. But we still have very low inflation, which is good. And then we also have the Federal Reserve kind of backing off, a little more dovish now.

    Kevin: The initial reaction to the Fed's raising rates seemed to be getting the market's attention in terms of declines. So now we kind have seen posturing that middle zone in terms of not too hot, not too cold in terms of backing off and earnings seem to be at least ... Earnings report so far and this month seemed to be positive as well..

    John: And just to set the expectations, last year had tremendous over 20% earnings growth. This year is going to be much more normalized. It's going to be in the single digits. That's not necessarily a bad thing. Studies have shown that when earnings come down from a high like that, the stock market actually tends to do pretty well.

    Kevin: Kind of like when the markets like a divided House and Senate, perhaps, maybe. Not too hot, not too cold. So you think about earnings, you think about where the markets were at when the market declined. A lot of comments that the valuations were relatively more attractive in terms of entry points in terms of risk management. But all things, you come back to the beginning which is the most important element, which is structure. So expectations as we go through this year and the importance of structure.

    John: Well, you look at the stock market over the very long term, even back to 1926, the return has been just under 7% nominal. The markets kind of ebb and flow, but that the channel has been pretty consistent. However, most of the returns, or at least two-thirds of the returns for most of that period, came from dividends. That's not true anymore. Now we would expect more of the return to come from capital gains than dividends.

    Kevin: So the importance of structure and having appropriate levels of risk and/or growth in your portfolio and being able to make sure you're comfortable with your volatility exposure, i.e., exposure to fluctuations when they happen, which they will.

    John: And you want an allocation to bonds to help be a ballast against that kind of volatility.

    Kevin: And, hopefully, warmer weather. We've gotten through the February period in Chicago. We're looking forward to spring around the corner. Days are getting longer. Until next time, enjoy.