Q2 2019 Commentary
Global stocks surged in the first quarter, with the S&P 500 Index of U.S. stocks rising a gaudy 23% from Christmas Eve to April 8th. At that point the index stood at 2,896 with a trailing price-to-earnings (P/E) ratio just shy of 211. That P/E ratio has only been matched or exceeded 17% of the time over the last 100 years, with much of the 17% coming during the ill-fated tech bubble of the late 1990s. The current P/E ratio is based on record high profit margins. If margins fall, as well they may, the P/E ratio would likely climb, perhaps considerably. This is all the more reason to worry that U.S. share prices are too rich. We share that concern, but it’s worth understanding why elevated valuations ratio may be warranted in light of recent events2.Read More
Q1 2019 Commentary
When we brought up the possibility of a bear market (a stock market decline of twenty percent or more) in our previous commentary—cognizant that the Federal Reserve’s interest rate hikes might eventually take a toll—we had in mind the next two years, not the
next two months. Little did we suspect that by Christmas Eve the U.S. stock market would come within a whisker of bear market status1.
Q3 2018 Commentary
For much of this year’s second quarter, fears of a trade war weighed on capital markets. Heated rhetoric over tariffs pushed stock prices down several times, with shares rebounding when the rhetoric cooled off. Thus far in the third quarter, the stock market seems to be shrugging off trade worries. Should it?Read More
Q2 2018 Commentary
Before we comment on the first three months of 2018, 2017 merits one last glance. Global stock market returns were excellent, but more striking was the complete absence of the kind of big swings that test in vestors’ nerves . The Dow Jones Industrial Average of thirty leading, blue-chip U.S. companies spent 239 out of 251 trading days within a 1% intraday range, the least volatile year in history. The biggest pullback for the year was just 2.8% (a gentle ride down over the course of six weeks), with only 1995 having a smaller drawdown. Every month in 2017 was higher than the last for the first time ever.Read More
Q1 2018 Commentary
As 2017 came to a close, stock market investors here and around the world had much to celebrate. As if superb investment returns–in excess of twenty percent on many indices–weren’t enough, Republican leaders in Congress finally delivered a tax bill that will slash U.S. corporate taxes and boost earnings. Although signs of euphoria have begun to appear (mortgages taken out to fund Bitcoin speculation qualify nicely), soaring share prices are not completely unjustified. The global economy, having begun to reaccelerate late in 2016 is now firing on all cylinders, with the Eurozone leading the way. The U.S. economy is doing its part as well, with capital expenditures beginning to perk up. While there is a great deal to debate in the tax bill as a policy matter, its near term economic impact will be positive. And even if it’s unclear how much of the reduction in corporate taxes will flow into the economy, shareholders win either way.Read More
Q4 2017 Commentary
The auspicious formula powering stock markets around the world remains intact. Economic growth remains strong in Europe, the U.S., Japan, as well as in China and most other emerging markets. Not surprisingly, a strong global economy is boosting corporate profits. Perhaps most importantly, interest rates remain remarkably low. We’ve made this point countless times but when investment grade corporate bonds are paying less than four percent and there are plenty of blue-chip stocks with a dividend yield of three percent or more and the possibility of significant price appreciation, stocks look reasonably attractive. And that’s true even if many valuation metrics make it appear that stock prices are at high levels.Read More
Q3 2017 Commentary
The KISS principle–Keep it simple, stupid—admonishes engineers to avoid unnecessarily complex designs. It’s also pretty good advice for anyone trying to explain the ups and downs of the stock market. In that spirit, there is a simple explanation for the U.S. stock market continuing to achieve record highs. Share prices are tightly linked to corporate profits, and bottom lines happen to be booming. For the twelve months ended March 31st of this year, S&P 500 earnings jumped 16.0%. For the quarter just ended, the corresponding number may come in at a whopping 22%1.Read More
Q2 2017 Commentary
For the better part of the last five months global stock markets have been on a roll. From last November’s presidential election through the end of the first quarter the S&P 500 Index climbed over 10%. Developed markets outside the U.S. rose even faster, gaining more than 12%. Conventional wisdom attributes the market gains to optimistic views of President Trump’s economic agenda. Accumulating evidence suggests, however, that markets may be reacting to something else.Read More
Q1 2017 Commentary
Twelve months ago, the stock market was in the midst of a sharp decline. By last February’s bottom, the S&P 500 Index had fallen over 11% on the year and 14% from its November 2015 high. That episode reminds us of several points that would be well to keep in mind at the current juncture. One lesson is that markets have a tendency to overreact. Another is that market corrections (a decline of more than 10%) are not unusual.Read More
Q4 2016 Commentary
From time to time, instead of devoting these pages to a recap of recent events in the economy and capital markets, we take a deeper dive into a specific issue. This quarter we examine the connection between aging populations and slowing global economic growth.
As we enter the final quarter of 2016 it appears that the global economy will decelerate for the fifth time in the last six years. Since 2012 global GDP growth has averaged around 3.2%, almost half a point lower than the 3.6% post-1990 average. While the shortfall is modest, it has been persistent and it’s worth trying to understand why.Read More
Q3 2016 Commentary
Should the United Kingdom remain a member of the European Union or leave the European Union? Three weeks ago, on June 23rd, that question was put to the British electorate. Markets opened the day confident voters would choose Remain. Investor optimism was due in equal part to: polls leaning slightly in that direction, a tendency for voter interest in risky referendums to fade in the voting booth, and plain old wishful thinking. In the end, by a margin of 52% to 48%, British voters chose Leave. The unexpected “Brexit” vote rattled financial markets and sent headline writers into overdrive.Read More
Q2 2016 Commentary
Early in the first quarter and for the second time in just over six months, global stock markets fell precipitously only to rebound sharply and recover almost all of the lost ground. Last summer the S&P 500 Index plunged by 13% in five trading days before climbing almost all
the way back in September. By comparison, January’s decline was more leisurely, with the index shedding a bit under 13% over three weeks, then rebounding sharply from mid-February to the end of March, at which point it was up a scant 0.8% on the year.
Q1 2016 Commentary
The first weeks of a new year bring prognostications regarding the twelve months ahead. We’ve never put much stock in these predictions, but as we think about the investment landscape for 2016 (and the years beyond), there are a number of questions that strike as particularly significant. These are the issues we are paying close attention to and that we think about in managing client portfolios. If we had a crystal ball—and sadly we don’t—we’d use it to answer the following:Read More
Q4 2015 Commentary
As Wall Street traders prepared for their late August vacations, the U.S. stock market was rather quiet. After reaching all-time closing highs in mid-July, market indices had drifted slightly lower but were still up for the year. An August 20th CNBC headline proclaimed, “S&P 500 is having a dull year, and that’s good for investors.” That day, and the next few, turned out to be anything but dull as the 500 stocks in the index proceeded to lose 10% of their collective value in just over two trading sessions. Taking into account the speed of the decline, it was the worst stretch for U.S. stocks (and most other stock markets) since the depths of the financial crisis.Read More
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