Record equity market highs were once again dominant in the U.S. as the domestic Standard & Poor’s (S&P) 500 closed above its January 2018 level. The upside comes as a positive surprise following the mild volatility in late July. As we gauge the risk landscape of the S&P 500, it appears that further upside seems possible when we consider the overall breadth of the market. Meaning, the capacity of equities that can rise to new highs is wider than that of January 2018, which implies that gains may be justified when we observe the market from a breadth and risk standpoint. We’re hopeful for such a potential outcome when we consider that just a handful of overvalued U.S. technology companies continue to remain responsible for a vast majority of gains within the S&P 500. As we step back from the U.S., however, and consider the notion of being a global investor, similar to how we are global consumers, it bares significance to note that the FTSE All World Equity Index has yet to come close to its previous high on January 2018. The act of global diversification is not something that has materially benefited investors on a year-to-date basis. In our opinion, that in itself should not be a deterrent of global diversification. Our historical analysis indicates that global diversification tends to exhibit long-term secular patterns of relative outperformance to U.S. markets. Various exogenous factors are embedded in that analysis that provide further insight on the length of each potential cycle and it also allows us to gauge the risk and return profile of each cycle, notwithstanding unforeseen uncertainties tied to geopolitics. Movements tied to the U.S. dollar, alongside rhetoric tied to open trade and immigration, are all factors that affect international assets. Most recently, the downside of the U.S. dollar in 2017 was a tremendous benefit for U.S. investors utilizing international diversification. That same exposure in 2018, however, has fallen victim to the fiscal policy rhetoric of protectionism and has resulted in a strengthening of the dollar. As mentioned earlier, this is simply a cycle that must materialize and play through. Timing such cycles tends to be a futile process that is best dealt with a proper risk management strategy and an ability to take advantage of opportunities during equity market volatility.
On the domestic economic front, existing home sales slipped for July relative to economists’ expectations yet the most recent reading remains above the YTD average monthly contraction. The gains in the early part of the year remained strong enough to provide a near-term boost. When placing the data in absolute numbers, the perspective of the housing market remains relatively positive in our view. A whopping 5.34 million units exchanged hands in July (annualized rate) and the trend appears to have slightly cooled down. As we gauge the housing market on a forward-looking basis, our assessment remains one optimism, especially over the next six months. Our base case catalyst for such a view stems from the upside potential in wage growth figures as well as the persistently positive sentiment of U.S. consumers. Fiscal policy has done little to further encourage the notion of home ownership and it appears that monetary policy has also done little to deter it, despite rising interest rates.
Minutes from the latest Federal Open Market Committee (FOMC) meeting indicated the Federal Reserve’s willingness to remain on an interest rate tightening path for the foreseeable future considering the strength of the economy. As of now, we believe such a strategy will do little to derail sentiment for home ownership.
Investment Policy Committee:
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.