April 2022 Newsletter

Posted by Koenig Investment on
 April 13, 2022
  · No Comments

The year has started off with a relatively volatile market, with the S&P 500 (a widely used gauge of broad stock market activity) down almost 10% by the end of January.  We saw additional up and down price swings throughout the quarter, with the S&P 500 ending down 4.6% as of March 31st.  There are several reasons for this activity.  As we have noted before, markets do not like uncertainty.  This quarter has seen uncertainty over lingering effects of COVID on the supply chain, the effects of the war in Ukraine on oil and commodity prices, continued concerns over inflation, and interest rate hikes.  Value and dividend paying stocks have performed better during this cycle as investors seek stability and certainty in uncertain times.

Inflation and interest rates

Inflation remains high at 7.9% as of the February Consumer Price Index.  Analysts do expect this to drop closer to 3% by the end of the year, in part due to the expected effects of interest rate increases.  The Federal Reserve has already begun to raise rates and has outlined a plan to continue to do so throughout the year.  The average 30-year fixed mortgage rate has increased from 2.84% in August 20211 to 4.86% as of April 20222, with expectations this will continue to rise as the Fed continues to raise rates.  This limits the amount many home buyers can borrow, resulting in cooling pressures on the housing market. 

We are seeing some initial signs of inflationary pressure easing.  Home prices are cooling in some markets.  Purchases of new appliances, home furnishings, and renovations should slow alongside housing.  Used car prices, while still high, have now fallen for the last two months.3  Supply chain pressures have eased for some industries as well.  While we are still early in this process, we are seeing signs of a return to pre-pandemic spending patterns that will ease some inflation concerns. 

Energy prices remain an area of uncertainty.  Russia is a large producer of natural gas and oil.  The sanctions levied against their producers as a result of their recent invasion of Ukraine has already caused energy prices to increase.  Additional sanctions are possible.  The impact of oil and gas prices on inflation is difficult to predict as this is tied to war, global demands, and alternate energy infrastructure builds that take time to implement.  Increased supply from OPEC is always a possibility, but this coalition has noted a preference for maintaining higher prices and an unwillingness to increase output to offset market losses from Russia.

Secure 2.0 Act

The Secure 2.0 Act is likely to pass near its current form.  This will delay the age at which retirement account owners are required to take mandated distributions, allow workers very near retirement to contribute more to their retirement accounts, and allow employers to help employees with student loans save for retirement, amongst other provisions.  We are monitoring these changes and will let you know if any affect you personally once the law has been finalized and passed.

Online security

We continue to see spoofing, phishing, and other scams proliferate online.  Here are some general rules of thumb to keep in mind for your safety:

  • Do not click on links from unknown sources. Links in e-mail and text messages can be used to install spyware and other malware onto your device.  The same applies to links in poorly maintained websites.  Know what you are clicking on before you click.
  • Scammers lie. They will pretend to be from a company or person you trust in order to abuse that trust.  If you are unsure of an e-mail link, do not use it.  Go directly to the company website instead.  Do not assume someone calling you is from the company they say they are.  Take down the information they give you and call the company back using the phone number listed on their website.  Independently verify who you are interacting with via some other channel than how they have contacted you.
  • Do not rush. We all make more mistakes when we are in a hurry.  Scammers use this to their advantage.  They make up false consequences to prod you to make quick decisions.  Take your time instead.
  • Neither e-mail nor text messaging are secure methods of communication. Do not send account numbers, credit card information, social security numbers, etc. via e-mail or text.  Use secure portals, encrypted communications, or tell the provider the information on the phone instead.

Summary

The outlook for 2022 is difficult to predict.  There are a variety of economic influences both domestically and abroad that will impact market returns.  While analysts and news outlets speak of likely outcomes, all are speaking with varying degrees of uncertainty.  For now, corporate earnings and job demand remain strong as our economy enters a period of monetary tightening.  Our office continues to focus on our client needs, planning for the unexpected, and maintaining diversified portfolios to help achieve account objectives and long-term financial goals.

As a reminder, the federal tax filing deadline is April 18th this year.  You can top off IRA or HSA contributions for 2021 at this time if you have yet to file.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented, nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

January 2022 Newsletter

Posted by Koenig Investment on
 April 8, 2022
  · No Comments

Major U.S. equity indexes enjoyed positive results in the final month of the trading year. As one indicator after another showed increasing inflation metrics during December, the S&P 500 continued to respond with fresh all-time highs. Broad, solid corporate earnings and a resilient consumer contributed to the S&P 500 finishing 2021 as the third consecutive year of double-digit percentage gains, even with uncertainties surrounding Omicron and inflation.

 

2021 Rewarded Long Term Investors

2021 featured spiking inflation, employment data zig-zags, higher interest rate anticipation, and proposed tax changes. All the while, the S&P 500 continued its upward trajectory during the year. We saw the emergence of meme stocks and other emotionally based investment trading.  Emotional investing tends to result in poorer long-term performance on average, and investors that held diversified portfolios faithfully were rewarded for their steadfastness in 2021.

As the year closed out, the large-cap S&P 500 led the way performance-wise when measured on a yearly basis, notching a 28.71% gain. The benchmark for international stocks (MSCI ACWI ex-U.S.) saw a gain of 7.82% for the year. Bonds did not fare well, with the U.S. Bond Aggregate Index declining -1.54% for the year. While it was certainly a year for the bulls, some sectors performed better than others, with technology leading the charge.

  

Fed Taper Acceleration, Rate Hikes on Table

The Federal Reserve announced it is speeding up its tapering operation, expecting to conclude the taper by March 2022 instead of June 2022 as previously announced. As a reminder, the Federal Reserve buys bonds (U.S. Treasury issuances and mortgage-backed securities) during times of financial instability in order to increase money supply and lower interest rates as a form of stimulus. Tapering occurs when the economy has begun to stabilize and this stimulus is no longer needed. A taper sets the stage for rate increases. The Fed now sees three rate hikes in 2022, though the potential for COVID to derail the Fed’s plan does exist.

U.S. 10-year note yields rose for the month of December, ending 2021 at 1.511%, up from 0.93% at the beginning of the year.

 

Build Back Better

An additional area of uncertainty is the second portion of the spending bills the federal government has proposed, known as Build Back Better. This legislation covers topics surrounding child and elder care, infrastructure to address climate change, and the tax changes needed to pay for these programs. It contains revisions around retirement account contributions, estate taxes, and capital gains taxes amongst its provisions. Whether this bill will pass, and what form any such final bill would take, are unknown at this point. Our office is watching the continued discussions and will reach out to clients with news about changes should they come to pass.

 

Retirement Contributions

The beginning of a new year means it’s time to review retirement account contributions. Are you taking advantage of your employer’s match? Have you contributed to your Roth or traditional IRA yet? The maximum contribution is $6,000 for both account types for 2022, $7,000 for workers age 50 and older. 401(k) contribution limits have risen to $20,500 ($27,000 if age 50 or above), SIMPLE IRAs to $14,000, and SEP IRAs to $61,000. HSA contribution maximums have risen to $3,650 for persons with individual plans, $7,300 for family plans (with an additional $1,000 contribution allowed for those age 55 and above). Please feel free to contact our office with any retirement planning questions you may have.

 

Summary

2021 was a good year for growth-oriented companies. Continued disruptions in typical living and working patterns due to COVID continued, creating opportunities for some companies and causing issues for others. We expect to see a continuation of this patchwork pattern for early 2022, with movement towards a new normal occurring later in the year.

We see indications of a general shift from growth towards value – companies that are often well-established, quietly making money. The anticipated rotation to value had a number of false starts during the year.  We still anticipate value to gain traction as the market rotates from high flying growth sectors. International sectors look attractive as the world rebounds from COVID disruptions. These valuations are at historic lows when compared to U.S. markets. We will continue to invest in high quality securities and maintain diversified portfolios to both give clients exposure to sectors that are expected to perform well and to protect against unforeseen downsides. We look forward to seeing what 2022 may bring.

 

 

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

October 2021 Newsletter

Posted by Koenig Investment on
 October 20, 2021
  · No Comments

In what is typically known as the worst month of the year for stocks, September did not disappoint. Negative news coming out of China was the focus during the month.  Headlines noted fear over Evergrande–a Chinese real estate investment holding company–potentially defaulting. The news weighed heavily on Chinese stocks Spillover effects trickled through markets worldwide, including here at home. In addition, the talks of a government shutdown (again), infrastructure bill challenges, government spending/debt ceiling disagreements, and a more hawkish Fed all contributed to the tone last month.

Increased volatility was on display throughout September, and many market participants expect it to continue through October – the most volatile month of the year historically. Here’s how the major U.S. stock indices performed in September: the S&P 500 shed 4.76%, the Nasdaq 100 lost 5.73%, while the Dow Jones Industrial Average decreased by 4.29%. While many market participants expect continued volatility, remember that volatility can create potential opportunities for some investors. These are the times to remember why we are engaged in long-term investing and long-term strategy.

Fed Tapering

The Federal Reserve announced that tapering of their asset purchases is in the cards but did not signal precisely when it would begin. The tapering could begin as soon as November. This asset purchase tapering is a gradual process that will most likely last until mid-2022. Fed projections are for an increase to the benchmark overnight lending rate over the next several years. The consensus is for the Fed Funds rate to increase from current levels (0% – 0.25%) to 1.75% by 2024. Half of the Federal Reserve members now see the first interest rate hike in 2022–but we do not know exactly when the first increase will be as of yet.

Bond Yields Rise Slightly

The Fed kept the overnight lending rate unchanged at their September meeting–just as the market expected. However, the Ten-year note yield ($TNX) and 30-year bond yield ($TYX) increased during September. Mortgage demand fell as 30-year mortgage rates rose to near 3.00%. 

Inflation

The heavily watched Consumer Price Index (CPI) showed that prices increased 0.4% from August to September, primarily driven by higher energy and food prices.  Consumer prices are 5.4% higher versus a year ago, the highest since January 1991. The IMF’s recently released report on global economies expects to see U.S. inflation drop to a more typical 2% by the middle of 2022. 

Supply chain issues have persisted, and perhaps you have noticed this during your routine shopping. Analysts are predicting continued supply chain issues through the holiday shopping season.  This does not mean an expectation of completely bare shelves, but is a warning that specific or preferred items may not be in stock.  

Year-End 

It’s hard to believe we are already counting down the final months of 2021. This also means it’s not too early to start planning for year-end deadlines. Consider reviewing your IRA, Roth IRA, 401(k), and HSA contributions.  If you have an RMD and have not already taken it, our office will be reaching out to you soon to schedule yours.  

Whether you have a simple investment question or you need help reviewing your entire financial picture, we are here to help. Our office welcomes the opportunity to work directly with your tax preparer or legal professional to help assist in your planning needs. 

 

July 2021 Newsletter

Posted by Koenig Investment on
 July 12, 2021
  · No Comments

We wanted to reach out and provide you with some updates as we head into the second half of the year. We are back at work in our Medford office, continuing to schedule phone and Zoom meetings for clients who prefer to maintain social distancing. Please feel free to reach out to the office to schedule a review of your portfolio or financial situation at your convenience.

Continued Economic Recovery

Major market indices enjoyed a fruitful June, building on their year-to-date (YTD) figures. The S&P 500 is up 14.4% YTD as of June 30th. The bond market (Barclay’s Aggregate Bond) gained back ground from April lows to end the month with a -1.60% YTD figure. The bond market has gained ground as fears of rapid inflation have subsided. Rising rates do tend to cause short-term bond price declines. The expectation of eventual rising rates are likely to provide a headwind to broad market bond prices over the near future.

The jobs data has been heavily in focus. Weekly reports have fluctuated between higher and lower figures as compared to expectations. Overall, hiring is up and workers are returning to the labor market. Not every industry is finding enough workers to fill as many positions offered as they would like, but this is to be expected from an economy that is restarting from pandemic shutdowns. Hiring is expected to increase as children return to school and parents can shift from childcare responsibilities to paid work. Changes to unemployment compensation and a lessened risk of virus exposure are additional major factors that will help push workers to return to the labor market. A number of workers are shifting between industries or employers, looking for higher wages or a better work conditions from employment. It will take some time for these shifts to slow and a more normal hiring pattern to resume.  Lastly, it remains to be seen how much of an effect virus induced early retirement will affect the labor market. The key component to all of these factors is time.

Inflation has obviously been a big topic in the news over the past few months. There is simply more money in the economy right now due to various stimulus efforts. These additional funds are chasing fewer goods as manufacturing comes back online and transportation of goods is restarted. We are also seeing shifts in buying patterns across larger than usual sections of the consumer market as people shift to post-pandemic life. These changes have combined to push up prices in some areas, but we are also seeing offsets in slowing sectors. For example, lumber made many headlines with spectacular price increases in 2020 and into early 2021. Those prices have now retreated significantly as stockpiling and home improvement activity has decreased. Not all sectors will see such dramatic swings, but we will continue to see shifts as spending habits change. The next CPI (Consumer Price Index) reading is on July 13th. We will continue to watch these readings for signs of inflation, be they transitory or more long lasting.

Interest Rate Hike Potential 

The markets were recently shaken by the potential rise in interest rates in early 2023. The announcement of higher interest rate guidance seemed to come as a surprise to many market participants. In a truly healthy economy, rates should not be this low. While the announcement may have been unwelcome news for some, we believe most market participants knew it was coming sooner or later. Whether we see measured increases begin in 2022 as some analysts have speculated, or further out into 2023, rate increases are to be expected when at historic lows. Measured increases will have effects on the market, but the effects are expected to be measured as well.

The Summer Stock Market

Historically, the market is a bit softer during the summer months, though there’s always the possibility that this year could be the exception. The market is looking for continued solid jobs data and some news on the inflation front. Restarting an economy does not happen in a day. Supply chain bottlenecks for some goods, uneven hiring, consumers and workers reevaluating priorities, and outbreaks of COVID in unvaccinated communities both here and abroad are all issues that should be expected to affect the path of economic recovery. 

Keeping tabs on the long-term is where success historically lies in the markets. Client portfolios remain positioned for the long-term. We will continue to evaluate recovery impacts on market sectors and how that affects portfolios. As always, please feel free to reach out with any questions you may have.

 

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities

April 2021 Newsletter

Posted by Koenig Investment on
 July 8, 2021
  · No Comments

What a change in the markets from this time last year!  Uncertainty over the effects of COVID-19 caused the S&P 500 to reach a low on March 23, 2020 that reflected a loss of about a third of its value from the pre-pandemic high.  The broad market has now not only regained that lost ground, but added a 20% gain to it.  To be specific, the S&P 500 is up 23.43% from February 20, 2020 to April 8, 2021.  We continue to see record breaking highs in the broad market, and that pattern is unlikely to change anytime soon.

Last year saw growth-oriented stocks do well as technology-oriented companies looked to meet the needs of a populous quickly changing daily habits.  We have now seen that cyclical activity come full circle as investors look for opportunity within value-oriented names.  Many companies that were hit hard in sectors such as the travel industry are now trading at or above pre-pandemic levels as investors have factored in pent-up demand. 

Benchmark 2020 Return 2021 1st Q Return
Russell 1000 Growth +37.07% +0.79%
Russell 1000 Value +0.18 % +10.84%

 

Interest Rates

We have seen interest rates begin to rise as the economy recovers from pandemic related lows.  As you can see from the graph below, interest rates remain historically low.  However, changes do have effects.  Refinancing of mortgages is no longer as attractive as it was a few months ago and financing new home purchases is starting to become more expensive.  Bond rates have risen some as interest rates have risen, but most short-term savings vehicles like bank savings and money markets remain near zero.  The outlook for future interest rate increases and the negative impact that will have on bond prices, has kept investors from shifting from dividend paying stocks to bonds.  Measured increases in interest rates will allow the broad market to absorb this change in activity though, which is what we have seen.

Future rate increases are expected to stay at the slow, measured pace we have seen through the rest of the year.  Slow changes will allow any sector losses to be offset by the strengthening of the broad economy as more establishments are able to safely resume normal business activities. 

 

Looking Ahead

Current broad market valuations are a bit on the high side, but only marginally so.  This leaves room for stock prices to continue to rise as the broad economy recovers from pandemic related losses.  Similar to interest rates, we are seeing a rise in oil prices as more typical travel patterns resume.  You may recall prices at the pump hovering around $4/gallon from 2012-2014 1.  We are still well below that level at this time.  As with interest rates, it’s a matter of how fast prices return to previous levels.  The economy can absorb the slow, measured changes in oil prices we currently see.

Analysts are generally positive regarding the rest of 2021.  The consensus for 2021 U.S. GDP growth is around 6.5%, which means corporate earnings growth should continue into early 2022 at the least.  The corporate tax rate was 35% as recently as 2017, so the recently proposed rise to 28% in the midst of record earnings by many companies is not unprecedented and not likely to meaningfully curb economic growth.  Taxes are also likely to rise on upper income earners (annual incomes above $400,000).  The proposed federal infrastructure spending should take these new tax revenues and put additional money back into the broad economy via spending on materials and labor for the projects.  The already significant 27%2 increase in money circulating in the economy should allow corporations to maintain current record profit levels.  Overall, we agree with analyst forecasts for a favorable investment environment for this year.

 

 

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – January 2019

Posted by Koenig Investment on
 February 6, 2019
  · No Comments

The month of January has seen a rebound in stock prices after a very rough December.  December saw a market awash in pessimism.  Part of this pessimism was based on worries over continued interest rate increases by the Federal Reserve.  This concern has diminished in January.  In general, analysts and investors are no longer concerned over a Federal Reserve rapidly increasing interest rates to a level that would send the economy into a recession.  The Federal Reserve has recently communicated a much more modest outlook for rate increases than they had late last year.

The biggest single driver of stock prices are corporate profits.  2018 profit growth came in at around 11-12% when backing out the benefits of the corporate tax cut.  2019 earnings are projected to be about 6%.  That is about half of 2018’s rate.  By historic standards, 6% growth is good.  We would encourage clients to keep this in mind when reading financial news.  To reiterate, 2019 is expected to see a lower rate of growth than 2018.  That does not mean a contraction, slowdown, recession, or any other negative activity.  It just means a slower growth rate.

In summary, the month of January has seen a significant portion of December’s market declines reversed.  This is due in large part to earnings releases that note revenues, sales, etc. during the last quarter, but also provide guidance for the next.  About a quarter of companies have released these figures so far, with the bulk of releases coming out over the next 2 weeks.  The main takeaways right now are that the market has largely gained back the declines experienced in late 2018 and that earnings are largely expected to continue to grow during 2019, although at a lower growth rate than in 2018.

Market Brief – December 2018

Posted by Koenig Investment on
 December 21, 2018
  · No Comments

As we head into the end of year holidays most friends and clients are focused on spending time with their families and friends.  The recent volatility in the stock market can be a worrisome distraction from this focus on community.  We wanted to take a moment to share some of what we are seeing, and hopefully eliminate some of this distraction for you.

The stock market is reacting negatively to this week’s Fed decision.  Just a few months ago the majority of analysts expected the Federal Reserve to raise interest rates by ¼% in December, and then to follow-up with three or four more ¼% rate increases in 2019.  This week’s announcement both implemented the expected ¼% increase for December and reduced the planned 2019 increases to two (from three to four).  The Fed is very careful in how they phrase all statements released after their meetings. Investors and analysts were hoping this release would mention future rate hikes would be “dependent on data” or “if conditions warrant.”  No such verbiage was a part of the statement.  This lack of flexibility has caused worry over the Fed continuing to raise rates even if we do begin to see an economic slowdown.  That worry has negatively affected the stock market.  Fed moves during expanding market cycles that result in stock market declines have happened in the past.  This is normal activity.

As we have stated many times in the past, corporate earnings are the biggest drivers of stock market activity.  Most corporate earnings releases are due to be released in early January.  A few companies have released in December.  Walgreen’s noted year over year earnings growth of 14% and an annual revenue increase of 10%.1  Federal Express said they are still expecting high single digit growth in 2019 earnings compared to 2018.2  Both companies noted positive figures for domestic growth, but slowing conditions outside of the United States.  Nike soundly beat expectations and expects their “momentum” to continue into next year.  January releases are expected to show domestic corporate profits are growing, with some indications for further growth in 2019.  Uncertainty regarding events like Brexit, in conjunction with political instability in some regions, will likely continue to place downward pressure on foreign markets until these issues are resolved. 

The broad market is very nervous at the moment.  Many investors recall past downturns and worry we may be entering another.  The U.S. financial system is in much better shape than it was in 2008.  In mid-2017, 30-year mortgages were about 3½ % while today they are around 5%. Unemployment at 3.7% is the lowest since the late 1960’s, but has likely achieved a low point.  Inflation around 2% is actually a bit lower than where we would be in a more mature expansion.  Valuations on U.S. stocks are around 14 ½ to 15 times earnings compared to 28 times earnings in early 2000.  We do expect to see lower growth figures released in January 2019 compared to January 2018 as the effects of the tax cut fade.  Profit growth in 2019 will be lower than in 2018, but it will still be growth.  There is no expectation that profits will contract, merely that they have come off of their 2018 highs.  International markets are expected to see further weakness.

We hope this information helps you better understand where the markets are now, as well as what further market related news you may encounter over the holidays.  We wish you the happiest of holidays!

Newsletter – November 2018

Posted by Koenig Investment on
 November 8, 2018
  · No Comments

October has lived up to its turbulent reputation and given us a fair amount of movement to analyze.  It can be difficult to know why the market has moved in any given time frame.  The good news is that the recent pullback in the market is expected to be temporary by the majority of analysts.  Here are some of the factors affecting current market behavior.

Interest Rates

You’ve likely heard news about the federal funds rate recently.  This is a common interest rate banks charge each other for overnight loans.  This rate then affects the rates consumers pay when banks lend to them.  The Federal Open Market Committee implemented 3 rate increases of 0.25% each to the federal funds rate in 2017.  There have been 3 more 0.25% increases in 2018, bringing the current rate up to 2.25%.  They would like to see this rate closer to 3% in order to give the committee room to lower the rate during the next economic slowdown. 

Both housing and auto sales have been impacted by these higher rates.  30-year mortgage rates are up a full percentage point in 2018, as compared to year-end 2017.  Rising rates allow investors to shift their stock exposure, while still earning some interest.  For example, we’ve seen 1-year CD’s and other short-term savings vehicles increase yields to around 2% annually.  Investments leaving stocks does place downward pressure on stock prices.  The rate increases have been measured and expected.  They are largely priced into the markets, but investors should not be surprised when the market moves some with each new rate increase. 

Bond funds have a portion of their portfolio maturing throughout the year.  As a bond bought 2 years ago matures, it is replaced with a bond yielding higher interest.  The bond funds we typically use in client portfolios have seen their interest income increase.  This will likely continue in 2019 as newly released bonds will continue to pay higher rates.  Rising bond yields mean retired clients can more comfortably cover a 4% withdrawal rate.

Earnings

The biggest driver of stock market performance is earnings, and expected earnings growth.  2018 is shaping up to be one of the best years on record for profit growth in several decades.  We have seen earnings releases with growth in same store sales, overall revenue, and/or earnings followed by a stock price drop.  Although this is typically unusual, it is rational in the current environment.  The most recent tax cut boosted corporate earnings, providing a nice tailwind in an already positive earnings environment.  However, that was a one-time boost that will not be repeated. 

As of November 2nd, 74% of S&P 500 companies had reported 3rd quarter results.2  78% of companies reported greater than expected earnings, and 61% greater than expected sales.  The blended third quarter earnings growth rate is 22.5%.  That is up from 19.3% at the end of September.  Financial news often mentions the “PE ratio” when talking about overall markets.  PE stands for price-earnings and reflects what an investor is willing to pay for a stock based on the earnings.  A stock with a PE of 10 means investors are willing to pay 10 years’ worth of the company’s earnings in order to own the stock today.  If a company is earning $100 annually, then the investor is willing to pay $1,000 for the stock.  The PE ratio for the S&P 500 is 15.6.  That is right in the middle of the 5-year and 10-year averages of 16.4 and 14.5 respectively.  None of this data points to an overvalued market.

2019 earnings are forecast to be about 10% higher than 2018.7  This is about half of what we saw in 2018, but higher than what we’ve seen in most years since the immediate recovery from the 2008-2009 recession.  The 10% growth in earnings is expected to provide a combination of some stock price growth and some lowering of PE ratios.

The Rest of the World

Foreign actively does effect the markets, and is the cause of some of the recent pullback.  Budget issues in Italy, and the EU in general, escalating tension between Turkey and Saudi Arabia, the trade dispute with China, and concerns over the Chinese economy have all affected the U.S. stock market recently.3  We should not be surprised over market moves as the Brexit process continues.  Activity in the Middle East will continue to affect oil prices, and how those prices impact the overall market. 

International holdings represent a much smaller area of stock market exposure in client accounts than U.S. holdings.  This sector had strong performance in 2017, but declined this year.  Underperformers in one year often outperform the next, and is part of why we maintain diversified portfolios.  We do not see any areas of great concern internationally in terms of stock market effect. 

Summary

Most U.S. investors today recall the market decline of 2008-2009.  Many also recall 2000-2002.  This understandably leaves some investors nervous when the market declines.  Both of those markets were impacted by bubbles bursting.  For example, tech stock valuations were far greater in 2000 than they are now, with a NASDAQ PE ratio of 175 in March 2000.4   The current PE is around 20.5  While investors have various concerns over the future of the market, valuations are not extended. 

Markets will decline in value and that can be nerve wracking.  This is why we design portfolios that are blends of equity, bond, value, and growth securities for clients.  The S&P 500 declined by about 9% from October 9th through October 29th.6  Client accounts with a diversified portfolio did not see this level of decline.  As of November 5th, the S&P 500 had regained about half of the drop, and is widely expected to continue to recover lost ground.  Analysts continue to see companies making money, and opportunities to share in this environment through the rest of 2018 and well into 2019.  We do not see any reason to exit the market at this time, but rather view this as normal cyclical activity.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase

Newsletter – April 2018

Posted by Koenig Investment on
 April 30, 2018
  · No Comments

Pausing to Smell the Roses

Economic news often looks towards the future as investors try to predict both the best places to invest and avoid.  Today’s successes are often overlooked as investors look for clear indicators of trends and future activity.  Sometimes it is best to stop and look at the current environment, appreciate what is going well, and wait to judge the future.  The overall U.S. economy is doing quite well at the moment and there is no reason to expect this to change in the near future. 

Earnings, GDP, PE

We are now well into 2018 first quarter earnings release season. The picture being painted is one of solid growth and earnings.  The earnings growth rate has been much higher than anticipated, with the highest earnings growth reported since the third quarter of 2010.1  In fact, one research service we use predicted an earnings growth rate of 17.3% for the quarter as late as April 6th.  This has now been revised upwards to 23.2%.1 

As earnings rise they change the price-earnings (PE) ratio for companies.  This ratio explores how long it would take an investor to recoup their principal based on current company earnings.  Low PE ratios mean investors can expect principal recovery much quicker, high PE ratios mean investors are paying a premium for stocks and can be an indicator of a bubble.  As you can see from the below chart, current PE ratios are right in line with the recent historical average.

SOURCE: Seeking Alpha3

Finally, GDP is a good indicator of the health of the economy as a whole.  2018 first quarter GDP stands at 2.3% versus 1.2% for the first quarter of 2017 and 0.6% for the first quarter of 2016.2  The first quarter tends to be the low figure for the year, so it can reasonably be expected that GDP will increase before the end of the year. 

The Rest of the Data

If the key metrics noted above are all positive, why the fear and worry in the news?  The first reason would be inevitability.  The stock market will eventually see a decline.  It goes through up and down cycles, meaning wait long enough and you will see prices fall.  One should pay attention to changes and not expect good times to last forever.  Let’s explore a few topics of worry in the news recently.  A good place to start is the slow ratcheting up of interest rates by the Fed. 

SOURCE:  MacroTrends4

The above graph is a chart of the 10-year Treasury rate over the past 50+ years (recessions noted in grey).  As you can see, we are currently in a period of historically low rates.  It’s also clear that we had higher rates in the 1990’s, a time of good performance by the stock market.  A rise in rates tends to slow housing sales and some business expansions as credit tightens.  However, these will be slow changes that are already widely expected and factoring into the decisions of families and companies.  Interest rate rises have been slow, and are expected to remain so.  Slow change allows for adjustment and is not the same as an unexpected market shock.  Interest rates are not expected to rise to a level that will prohibit borrowing, but rather to return to more historical norms.  This is good news for savers and an anticipated change for future borrowers.

Other articles point to a few large companies lowering guidance as a sign we’ve reached peak earnings.  It’s true that Caterpillar recently noted 2018 earnings may be their best and 2019 will likely be lower.  At the same time, Boeing both had good earnings and upwardly revised estimates through 2019.5  The fate of one company is not the fate of the economy as a whole.  Aggregate S&P 500 earnings estimates for 2019 have been revised upwards as companies release figures and give forward guidance.  That means companies generally do not see 2018 as a year of growth plateau, but rather as part of an upward trajectory that is expected to continue into 2019.

The last area of worry for some pundits is both wages and inflation.  We are seeing an uptick in both categories.  These are areas to watch for future developments that may provide drags on the economy.  We’re not there yet though.  Inflation remains at about 2.0%6 and wage growth is still at a lower rate than before the recession7.  Rising wage growth and inflation can be expected to limit the acceleration of economic growth, but are not expected to be a drag on the economy.

Summary

Some clients reading this may be wondering why their portfolios are not skyrocketing upwards given that the economy is doing well.  The stock market is considered a leading indicator and typically moves in advance of economic news.  The S&P 500 was up every month in 2017.  That is unusual.  Much of the good news noted above has already been priced into the market, allowing account values to increase in 2017.  The 2018 market is expected to increase more slowly, with more volatility than 2017.  Investors are looking to sell companies that have not benefited as much from economic growth, capture gains, and move on to other companies with rosier outlooks for the year.

The overall U.S. economy is doing quite well.  Persons looking for a job can probably find one with relative ease.  Borrowing costs remain historically low.  Companies are making money and looking to make more over the next year or so.  Of course, the market will eventually change and we will continue to watch for indicators of that change. 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Newsletter – January 2018

Posted by Koenig Investment on
 February 27, 2018
  · No Comments

Year in Review

2017 has been a year of surprises.  An anticipated market pullback did not materialize this year.  Instead, we saw a year of above average growth in market price.  The S&P 500 (a widely followed basket of 500 U.S. company stocks) ended at 2673.61, a gain of 21.83% on the year.  A round-up of statistics shows GDP remained at a steady rate with the third quarter at 3.2%1.  Unemployment is at historically low rates, with December’s figure at 4.1% per the Bureau of Labor Statistics (BLS).  Lastly, foreign companies did well in 2017.  The International Monetary Fund (IMF) shows most mature economies with slow growth, while developing countries typically saw higher growth rates that bode well for their economies.2  2017 markets reflected this growth as the international sector posting its biggest gain since 2009. 

2018

What can we expect of the new year?  A recent issue of a research service we subscribe to summed up bull vs. bear market conditions in a helpful manner.  The market tends to contract when we see a combination of tight money, rising rates, high inflation, and rapid growth.  We do not currently meet these criteria.  The Fed is slowly scaling back measures taken during the recession at a measured pace.  Money supply is slowly tightening as the Fed increases interest rates.  Rates are inching up and do not have us in an era of either tight money or truly rising rates.  Inflation remains low, with the personal consumption expenditure (PCE) price index at 1.5%3.  GDP continues at measured rates in the 2-3% range each quarter.  The outlook for 2018 real gross domestic product (GDP) is in the 2-3% range as well.  All of this together shows a picture of slow, steady grow rather than the beginnings of a pullback.  There remains the possibility of a correction in the market, with analysts looking towards a temporary event like we saw in early 2016 rather than a sustained bear market.

There is an expectation of greater earnings due to the recent corporate tax cut, although much of this is seen as already priced into the market.  Increased earnings will largely result from balance sheet reshuffling in the form of debt reductions, stock buybacks, and mergers or acquisitions4.  These will be one-time events that will solely enhance 2018 earnings.  Analysts expect the resulting gains to be temporary, lasting perhaps 12-18 months.  This, in conjunction with historically high consumer sentiment, bodes well for the 2018 market. 

It is helpful to pick a company benefiting from the tax changes in order to see the details.  Bank of America has been in the news recently as they announced an additional employee bonus of $1,000 for about 145,000 employees5, a total cost of $145 million.  Goldman Sachs estimates that Bank of America will see earnings grow by 14% due to the cut.  That would translate into earnings increases of about $2.5 billion.  Roughly 6% of the $2.5 billion received by the corporate tax cut will go towards employee wages.

Bank of America also noted a $5 billion increase in stock buybacks, above the $12 billion repurchase amount announced earlier in the year.6  Stock buybacks are used to increase earnings per share, which results in higher stock prices.  In summary, Bank of America will spend an extra $145 million on employee wages and spend $17 billion on stock buybacks in 2018.

The real world results from the tax cut will become clearer in 2018 as accountants have more time to delve into the provisions.  As with any change, there will be winners and losers due to the changes. The overall effect does appear to be a boost for a number of companies that will increase near-term earnings.

Summary

Foreign markets saw meaningful progress in 2017 from both consumer spending and corporate profits.  We believe many international markets are 3 or more years behind the U.S. in their economic activity.  We expect to maintain a fair degree of international exposure in client accounts in order to capture this growth.

There are a number of fiscal unknowns due to the changing of the U.S. tax code.  Accountants all over the country are working hard to analyze the impacts.  However, the bottom line for stock market growth is always corporate earnings.  Earnings have been rising and are expected to continue to do so.  There will likely be a modest boost to corporate earnings and overall economic activity this year due to the cuts.  The full impact of these changes will become clearer as we move through the year. 

We agree with analyst expectations of low level growth within the domestic market next year.  We will continue to posture client accounts to capture some of this growth, while protecting against downside events.  It is important to maintain downside protection in portfolios given that growth is expected to be limited.  We may see a pullback in the markets in 2018 or an unplanned outside event that causes disruptions.  We would view these events as acquisition opportunities.  Overall, we expect 2018 to be another year in the plowshare economy.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities

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