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May 23, 2017

Positive Economic News

The stock market’s performance is most often supported by what is occurring in the economy. As such, the following is some good news for the market.

  • Industrial production - a measure of output at factories, mines and utilities - jumped 1.0% from a month earlier, the Federal Reserve said last Tuesday. That was the largest gain in more than three years.

 

  • The unemployment rate falling to its lowest level since 2007.

 

  • Solid consumer-spending gains at online sellers, restaurants and other retailers; and existing home sales climbing at their fastest pace in a decade. As a matter of fact, home sales in the first quarter of this year climbed to their highest level since the same period of 2007 per the National Association of Realtors.

 

  • The firms comprising the S&P 500 saw their earnings climb 14% in the first quarter of this year.  

 

  • As of last Friday, the 10-Year U. S. Government bond is yielding around 2.25%, which is still historically low and illustrates that interest rates are not racing upwards.

 

The prior economic news suggests healthy demand from consumers and businesses, reversing some gloomier readings from earlier in the year. Last week it was reported that manufacturing output, the biggest component of industrial production, posted its strongest gain since early 2014, pushing the Fed’s manufacturing index to a new post-recession high.

Politics and associated investigations took a toll on the market last Wednesday, and we saw the S&P 500 decline 1.80%. That being said, this is only the second day this year that the S&P had a decline of over 1%. In comparison, the NASDAQ Composite of 5000 stocks was down over 2%, but it had gone 171 trading sessions without such a downward movement, which is its longest streak since 2006. All three major U.S. stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) bounced backed on Thursday and Friday.

Famed market historian, Professor Jeremy Siegel, believes the Dow Jones Industrials could rise another 10% by the end of this year, regardless of what political turmoil takes place in D.C. He believes that tax reform in the U.S. combined with reduced fears of negative economic events overseas, especially in light of good growth prospects coming out of Europe, all set the stage for a resilient stock market going forward this year. Professor Siegel reminds me a lot of the old E.F. Hutton commercials – when he talks, you listen!

Investors Have Good Reasons to Look Overseas

The U.S. has been the favored place for stock investors over the past decade, and U.S. stocks have handily outpaced their foreign counterparts. For example, the S&P 500 outpaced the MSCI EAFE index (tracks 21 developed-country markets outside the U.S. and Canada) by a margin of more than 2 to 1. In addition, while U.S. stock indices continue to climb to new all-time highs, the MSCI EAFE is still 20% below its former record set in 2007.

The fate of emerging market stocks has been even worse. Since the beginning of 2012, the S&P 500 has beaten its foreign counterpart, the MSCI Emerging Markets Index by a factor of almost 5 to 1.

As the following charts illustrate, foreign stocks have at times outpaced U.S. stocks and looking forward analysts see foreign stocks offering much better returns in the years ahead. 

Global Investing: Taking a Long View

 

Ufortunately, most investors have soured on international stocks due to the sizable underperformance in relation to U.S. stocks over the past decade. However, this disparity in performance has not always been the case. Since 1977, the MSCI EAFE averaged 7% annually compared to 8.3% for the S&P 500.

The economic fundamentals are improving in Europe. For example, in the first quarter of this year European big companies saw their earnings rise by 23% as compared to 14% for S&P 500 firms as compared to the prior year.  As a matter of fact, the following chart shows various metrics that foreign stocks are a better bargain.  In addition, just last week the European Union raised the economic growth forecast for 2017. 

How They Compare

  

 

 

 

 

 

 

 

 

 

 

 

In conclusion, to buy foreign stocks at this point to is to be true contrarian, because of the prior underperformance as compared to here in the U.S. However, for those who are willing to look forward, or as they say in hockey – where the puck is going, higher returns may be venturing outside the U.S. and one’s investment comfort zone.

A Change in How We’re Approaching Debt & a Message for New Graduates

Total U.S. consumer debt just now returned to its 2008 peak. However, borrowing has shifted to student and car loans. The total amount of credit card, home equity loans and mortgages are below their levels in 2008, as well as their delinquency rates. Unfortunately, the same cannot be said for student and car loans. Their total outstanding amounts and delinquency rates both exceed their prior peak levels of 2008. It appears that consumers have taken a more cautious approach with home-related debt and their credit cards, when compared to student and car loans.

From all the stories I’ve read and heard, most consumers that experienced the “Great Depression” of 2008-2009 and the related housing crisis have not forgotten the pain. As such, they have made a valiant effort to keep their home-related debt and credit card balances in check, as compared to those carrying student and car loans. I sincerely hope that those graduating and/or relatively new to starting their careers practice good fiscal habits. Living below their means, setting up an emergency fund, paying down debt and setting some money aside for retirement are all integral parts of obtaining money maturity. Bottom line, when it comes to finances, delayed gratification (i.e., saving vs. spending) is the more reliable path to financial security.

Along this same story line, automakers are starting to see sales decline in the U.S., while their inventory of unsold cars climb to its highest level in the last several years. As a result, car prices (new and pre-owned) are starting to decline and those in the market for a newer car will benefit going forward. I personally believe that if you want to upgrade to a newer vehicle, you will be in much better buying position in the coming months or even year ahead.

Integrity Advisory Welcomes Summer Intern, Scott Schaeffer

Scott Schaeffer is an incoming senior at Rockhurst University, majoring in corporate accounting/finance. His previous work experience includes many summers spent on the golf course while caddying at Persimmon Woods C.C. in St. Louis. Additionally, Scott worked for Kavar Capital Partners last summer. At Kavar, Scott worked to perform Morningstar stock performance reviews, eMoney data tracking, and CRM updates. This Summer, Scott will be working closely with the Integrity Advisory team to learn more about financial planning, investments, estate planning, and many other aspects of running a successful small business.

Scott was born in Cape Girardeau and moved to St. Louis at the age of 8, living there until deciding to attend college at Rockhurst. Scott is a passionate sports fan, and follows the Cardinals, Blues, and Kansas Jayhawks regularly. When not in the classroom, you can usually find Scott on the golf course. As a two-time all-state performer in high school, Scott’s decision to attend Rockhurst was influenced by receiving a scholarship from the team’s golf coach. Scott will return for his senior year at Rockhurst after posting the team’s best scoring average for the year, and hopes to attend graduate school in a fifth year at Rockhurst while serving as a graduate assistant to the golf team. At the completion of his M.B.A. curriculum, Scott hopes to be C.P.A. eligible in the spring of 2019. 

Quotes

“It was my mother who taught us to stand up to our problems, not only around but in ourselves.”

                   Dorothy Pitman Hughes

“Life isn’t about waiting for the storm to pass. It’s about learning to dance in the rain.”

                   Vivian Greene

“Whatever we plant in our subconscious mind and nourish with repetition and emotions will one day become reality.”            

                   Earl Nightingale           

Quotes selected by the IA staff

“Financial peace isn’t the acquisition of stuff.  It’s learning to live on less than you make, so you can give money back and have money to invest.  You can’t win until you do this.”                 

                   Dave Ramsey 

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

                    Warren Buffett

 

Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

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