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Last Quarter Review:   Volatility is back and is likely to continue with an upward bias dependent mostly on actual earnings and unexpected economic data results. While the election has an impact on the market, it usually is not lasting. Policy for growth or not is lasting. For the quarter, the market was up 3.3%, the best quarter YTD. US Growth segments dominated which is more compatible with our US focus. International Emerging Markets improved markedly this past quarter. We may invest further in this area soon.

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Investment & Economic Summary (source – Moody’s Analytics): Economic data is not robust and is mixed with both positive and negative indicators, but overall the data favor Bulls (optimists) over Bears (pessimists). The FED continues to hold interest rates yet has signaled directly that they will rise this year, perhaps in December. Unfortunately the FED is currently the only game in town to stimulate the economy. Economic details are:

  • Consumer confidence gained 2.3 points in September, on top of the 5.1-point gain in August, carrying consumer confidence to its highest level in nine years. The three-month moving average broke 100 for the first time in 11 months on the strength of the last two months. The consumer sentiment index improved for the first time since May, gaining 1.4 points to 91.2, buying back the weaker readings from July and August. The stronger reading was primarily a result of improving consumer expectations.
  • The Conference Board index of leading indicators fell 0.2% in August, below consensus expectations that it would be unchanged from July. The decline was led by the ISM new orders index and average weekly hours for production workers in manufacturing.
  • The ECRI weekly leading index rose 0.1 point to 139.0 and is 9.0 points, or 6.9%, ahead of a year ago.
  • The tighter labor market is putting upward pressure on wages and this should only intensify, since the economy isn’t far from full employment (though the Labor Force Participation index is at a 38 year low). The employment cost index for private wages rose 0.6% in the second quarter, leaving it up 2.6% on a year-ago basis.
  • The Bureau of Economic Analysis reported that the economy expanded 1.4% on an annualized basis in Q2 after rising 0.8% in the prior quarter and 0.9% in the final three months of 2015 continuing the weakest expansion since World War II.
  • US e-commerce retail recorded $97.3 billion worth of sales in the second quarter, a seasonally adjusted gain of 4.5% from the first quarter of 2016. In comparison, total retail sales for the second quarter increased by 1.5% from the previous quarter. Internet sales were up 15.8% from a year earlier. E-commerce’s share of total retail sales increased to 8.1%.
  • The ISM manufacturing index was surprisingly weak in August. The index fell 3.2 points to 49.4 in August, a larger decline than anticipated. The ISM nonmanufacturing index disappointed in August, falling 4.1 points to 51.4. This is the third decline in the past four months. August’s drop was the largest since 2008 and puts the index below its second quarter average of 55.
  • Nonfarm productivity is now shown to have fallen 0.6% at an annual rate in the second quarter. This is the third consecutive quarterly decline in productivity. Personal Income rises when Productivity increases.
  • The probability the U.S. will be in recession in six months continues to slide, falling 2 percentage points in August to 13%. This brings the cumulative improvement since May to 7 percentage points.

Expectations – next quarter:   Earnings improved again this past quarter with Q2/Q1 increasing to 7.22%.

3-sp-tableThe headline number of Yr/Yr operating earnings of -1.68% is troubling yet the Qr/Qr data suggests upward earnings momentum. This recent market quarter has moved outside of the 2 year trading range. We expect it to continue.

 

Equities Aren’t Cheap, but Appear Relatively Attractive: Bob Doll, September 26

“Equity prices have advanced over the last few weeks, as central banks signaled they will continue to promote growth and provide liquidity. The Fed remains the only central bank pondering a rate increase, although it has signaled it will move cautiously. This backdrop is likely to suppress government bond yields despite mounting evidence of global economic growth improvements. Such an environment is supportive for risk assets.

As such, we continue to believe in a mildly pro-growth, pro-risk investment stance. We think equities will likely improve against a backdrop of record-low interest rates and modestly improving growth. When the Fed finally raises rates again (probably in December), it could jolt the markets. But even with another 25 basis-point increase, the fed funds rate would remain extremely low given the growth and inflation environment.

At the same time, we understand why many investors are cautious. The world continues to recover from the financial crisis and Great Recession, remains in deleveraging mode and navigates a wide array of geopolitical uncertainties. Compounding this backdrop, pockets of the equity market are somewhat expensive historically. Given low bond yields and meager cash returns, however, we think equities look attractive on a relative basis. And we expect equity prices to continue grinding slowly higher over the coming year.”

The coming quarters look attractive from an earnings perspective. Yet the PE ratio (the ratio between a company’s stock price, P, and the company’s earnings, E) is extended. The market may choose slower market growth to lower the PE ratio towards the mean of roughly 15 from current 21 or somewhere inbetween. Much will be dependent on global trade which will be dependent on growth policy changes by global governments. Life is complicated these days and leadership counts. Let’s hope global leadership actually leads allowing citizens to improve their family financial situation.

Liz Ann Sonders, Schwab Chief Strategist regarding a future recession within 12 months  9/26/16

4-lei-table“One of the reasons for the popularity of the CB’s LEI (Conference Board’s Leading Economic Indicators) is that the CB is transparent with its underlying data, and the sub-indexes are easy to track.  There are ten sub-indexes within the LEI and nearby is the aforementioned dashboard showing a color-coded review of the individual indicators.

 

Source: Charles Schwab, The Conference Board, as of August 31, 2016.

“There is unquestionably a bit more red on the page than there was last month, with ISM new orders and consumer confidence particularly bearing watching.   But I don’t yet view this as particularly alarming.

Yes, this has been a historically-long recovery of over seven years, or 86 months—which compares to the post-war average of 58 months.  But expansions don’t typically die of old age, they die of excess.  The excess is often in the form of inflation, monetary policy, capital spending, capacity utilization, debt, etc.  If there is one benefit to this recovery having been of the anemic variety is that it’s kept this excess in check.”

Lastly, we wanted to share some organizational news with you.  We have mutually and cordially agreed to part ties in a professional sense with Dustin.  We’re appreciative of the time he spent with us and know that he’ll be a success at his next employer.  We’ll miss his presence in the office, but are excited to hear what’s next for him and his career.

2016 is our 30th year helping clients manage their wealth and planning their future. Thank you for being a part of that.

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