Global equity markets managed to post yet another week of positive gains as the potential for positive trade outcomes between the U.S. and China gained renewed media attention. Gains across U.S. equity indices managed to fare the best as they posted the strongest streak of consecutive weekly upside in nearly 30 years, as depicted by the Standard & Poor’s (S&P) 500 and the Dow Jones Industrial Index. The S&P 500 gained 0.65% for the week while emerging market equities (MSCI EM Index) gained the most with a gain of 2.79%. The strong, and quick, upside has many market participants questioning the potential for continued gains amidst the political rhetoric that appears to be changing on a weekly basis. From an objective standpoint, technical analysis indicates that a short-term pause may be possible yet other factors, such as earnings momentum and lack of new 52-week highs, suggests that gains have room to run. Whatever the case may be, if you’re wondering when a good time is to participate in equity markets, or even consider increasing your equity market participation, the answer is now. The risk centric approach of equity allocation within the Credent Wealth multi-strategy platform is one that attempts to derive positive risk adjusted returns over varying market cycles. For those investors with at least a 10-year time horizon, the ability to utilize multiple strategies, and benefit from their unique integration with each other, is something we strongly urge. In terms of the earnings backdrop as a potential catalyst for further gains, the quarterly earnings seasons has been one of optimism. A total of 448, out of 500 companies within the S&P 500, have reported earnings with an aggregate growth rate of 11.60%. This follows the impressive 24.1% growth rate from the previous quarter and the 24.4% in the one prior to that. This is important to understand because we cannot expect earnings to indefinitely grow at +20%, or more. The current rolling streak of the previous four quarters is something that does have to eventually cool off prior to the next cycle beginning. Attempting to time such a cycle, however, is not a smart decision. Employing risk management tactics and attempting to minimize unexpected downside risk is a notably better approach, in our opinion.
One of the most important announcements during the week revolved around the release of FOMC meeting minutes (Federal Open Market Committee). We learned that interest rate hikes are likely to remain on pause for the time being but it’s possible that hikes will materialize if equity markets hit new highs and/or if trade talks with China take a turn for the positive. The notion of data dependency from the Federal Reserve must be taken into context and reevaluated at each interval of macroeconomic data releases. The current meeting minutes, as it stands, provide no actionable steps for short-term risk management guidelines. We’re keeping a close eye on all monetary policy developments and have maintained our stance of partial interest rate hedging in our fixed income portfolios. In other news, initial jobless claims remained impressively low last week and continue to support the health of the labor market. On the housing front, the release of January existing home sales failed to surprise to the upside, which resembles a recent trend of underperforming growth in the housing sector. We’re starting to weigh such a trend on the potential for it to drag other sectors lower. This would not be abnormal in such late stages of the business cycle. Lastly, the index of leading economic indicators maintained its near-term downtrend and is starting to resemble the activity we experienced in late 2014 leading through to the end of 2015. Although no systemic risk appeared on the economic front, the threat of a near-term neutral equity market may be one that has viability.
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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.