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Commentary Archives

Market and Economic Commentary

 

1st Quarter 2017
Summary: Overview

The economy continues to grow slowly.  While banks appear to be tightening credit standards for both commercial and consumer borrowers, overall economic activity is picking up.

Rates are rising.  With the Fed expected to raise rates two more times this year, it appears that a secular bottom is in place.  Historical data show that both stocks and bonds perform well during the first years of a rate hike cycle.

Technical indicators remain mixed with no clear direction in the near-term.  We expect continued sector rotation to occur.

Stock volatility is at a 30-year low.  An increase in volatility and a correction seem inevitable and may have already started.

Earnings projections are anticipated to be up 10% in 2017, the first material gain in three years.  Given the high market valuation, earnings need to meet expectations to support current price levels.

Download the full report in pdf here: IMVA Investment Overview – April 2017

4th Quarter 2016
Summary: Overview

Prior to Election Day, global growth appeared to turn higher in significant regions of the world.  We believe that the return of global growth could be one of the main positive developments in the new year.

Having declined over a 35-year period, interest rates likely have reached a secular bottom.  The expansionary economic policies of the incoming administration could stoke nominal GDP growth and inflation and, in turn, spark higher interest rates.

After the post-election rally, equity valuations appear to be at the top end of the historical range.  The recent upturn in corporate profits will need to continue in order to support such valuations.

Technically the market remains in a bullish uptrend, but equities appear overbought in the near-term.  We would not be surprised to see a correction or period of consolidation in 2017 as the market digests recent gains.

Download the full report in pdf here: IMVA Investment Viewpoint January 2017

Market and Economic Commentary

 

3rd Quarter 2016
Summary: Overview

The third quarter started out with upbeat reports on the strength of the housing and auto markets, continued strong job growth with higher wages, and improved consumer confidence. In late August and early September, however, the market paused on hawkish commentary by the Federal Reserve.

After the Fed left rates untouched and the dust settled on the quarter, the S&P 500 Index had advanced, on a total return basis, 3.85% for the three-month period and 7.84% year-to-date.

Equity valuations remain at the top end of the historical range, but dividend yields appear supportive in what we expect to remain a low-yield/low-return environment.

Looking ahead, many concerns remain: Brexit, rising macroeconomic and geopolitical tensions, full valuations for equities and fixed income, negative sovereign interest rates, divergent central bank policies, widespread populism, and the divisive political climate in the U.S. and in other countries with upcoming elections. If (as famous investor Ken Fisher, citing John Templeton, reminds us in a recent MarketWatch interview) bull markets usually collapse amid euphoria, we are not seeing any! Some recently released data, notably that of the ISM Manufacturing Index, do appear encouraging.

Download the full report in pdf here: IMVA Investment Viewpoint – October 2016

 

 

Market and Economic Commentary


2nd Quarter 2016

Summary: Overview

Early in 2016, activity in the financial markets reflected fears about declining Chinese economic conditions, tightening on the part of the U.S. Federal Reserve, mounting evidence of global deflation, and rising risks of a recession. Oil prices also fell dramatically, which placed downward pressure on credit markets, the banking system, and broader equity markets.

Heading into June, animal spirits and some data had improved: the Chinese economy and the value of the U.S. dollar appeared stable; oil prices had rebounded from $26 per barrel to the $40-$50 range; the U.S. economy reflected modest growth with jobless claims nearing 26-year lows; and the Federal Reserve had reiterated its dovish stance on U.S. interest rates in advance of the “Brexit” vote (the referendum in the U.K. on whether or not to remain in the European Union). U.S. equity markets had risen for three consecutive months and were positive on a year-to-date basis.

Late in June, the U.K.’s populace – in a 52% to 48% vote, with 70% turnout – surprised the pollsters and opted for “Leave”, creating much uncertainty. Low worldwide interest rates plunged even further. Germany’s 10-year Treasury Bund traded at a negative rate for the first time in its history. The U.S. 10-year Treasury yield touched 1.44%, having ended 2015 at 2.27%.

Despite the “Brexit” surprise, the U.S. equity markets – after a tough couple of days – continued to climb the wall of worry into quarter-end, with value and dividend stocks leading the way. As of June 30th, the S&P 500 Total Return (“TR”) Index had gained 2.46% for the quarter (and 3.84% YTD); the Dow Jones Industrial Average had advanced 2.07% (and 4.31% YTD); the S&P MidCap 400 TR Index was up 3.99% (and 7.93% YTD); and the S&P SmallCap 600 TR Index had risen 3.48% (and 6.23% YTD). Leading sectors included Telecommunication Services, Utilities, Energy, and Consumer Staples, each with double-digit gains on the year. Financials, Information Technology, Health Care, and Consumer Discretionary lagged. The markets effectively have treaded water for much of the last two years, setting new highs in May of 2015, followed by two 10+% corrections. Aggregate earnings have also remained flat over this timeframe but show signs of basing.

Download the full report in pdf here: IMVA Investment Viewpoint – July 2016

1st Quarter 2016
Summary: Overview

Between the opening bell of the New Year and February 11th, the major U.S. stock indexes plummeted more than 10%, reaching levels that were approximately 14% below the May 2015 equity market top. The litany of worries that drove this weakness included: decelerating economic growth and devaluation of the renminbi in China, which threatened to hamper trade in other economies, both developed and emerging; weakening crude oil prices, which touched $26 per barrel in February, a level well below breakeven for most energy companies and resource-dependent countries; the strong dollar, which made U.S. goods less competitive in foreign markets; and the hawkish tone of the U.S. Federal Reserve, which seemed determined to raise rates/“normalize” even as 2016 earnings and GDP forecasts were being revised lower – and as many foreign central banks were cutting their rates (into negative territory in some cases). Additionally, credit markets tightened on fears that defaults in the energy complex would weaken the financial system. As perceived risks appeared to be mounting to the downside, the seeds for relief were already being sewn.

On January 27th, the U.S. Federal Reserve opted not to raise the Federal Funds rate. In the weeks that followed, the European Central Bank announced an expansion of its stimulus package, and China took steps to steady its economy and allay fears of further, massive currency devaluations. Then, in late March, U.S. Federal Reserve Chair Yellen acknowledged, in prepared remarks before Congress, that global economic conditions had weakened, and she specifically emphasized the need to “proceed cautiously”. Soon thereafter, expectations for rate increases during 2016 fell from four times to two, and the U.S. dollar weakened, dialing back the pressure on foreign currencies, especially those of struggling, emerging markets.

While the world obsessed about what might happen, various U.S. economic data revealed that what was actually happening might not be so bad. In fact, by the end of the first quarter, the data showed that unemployment had declined to a cycle low; wages had started to rise; consumers were judiciously spending even as savings had increased; auto sales had remained near record highs; construction and housing trends had strengthened; new household formations had risen; and some manufacturing data had improved. According to Evercore ISI research, company surveys near the end of the quarter were consistent with 2% Real GDP growth. One of the Federal Reserve Bank Presidents, John Williams, recently asserted that the world’s largest economy is doing “quite well.”

Eventually, investors digested the possibility that all of their worst fears might not be realized imminently, and the markets recovered. Despite a rocky start, the S&P 500 Index, the S&P MidCap 400 Index, and S&P SmallCap 600 Index delivered total returns of 1.4%, 3.8%, and 2.7%, respectively, in the first quarter. The Dow Jones Industrial Average advanced 2.2%. Equity leadership rotated/broadened from a narrow set of “growth” stocks, which had dominated in 2015, to “value.” Stocks with defensive characteristics and/or high quality dividends led the breakout.

Download the full report in pdf here: IMVA Investment Viewpoint – April 2016

4th Quarter 2015: IMVA Investment Viewpoint – January 2016

 

3rd Quarter 2015: IMVA Investment Viewpoint – October 2015

 

2nd Quarter 2015: IMVA Investment Viewpoint – July 2015

 

1st Quarter 2015: IMVA Investment Viewpoint – April 2015

 

4th Quarter 2014:  IMVA Investment Viewpoint – January 2015 

 

 3rd Quarter 2014:  IMVA Investment Viewpoint – October 2014

 

2nd Quarter 2014:  IMVA Investment Viewpoint – July 2014

 

1st Quarter 2014: IMVA Investment Viewpoint – April 2014

 

4th Quarter 2013: IMVA Investment Viewpoint – January 2014

 

3rd Quarter 2013:  IMVA Investment Viewpoint – October 2013

 

2nd Quarter 2013:  IMVA Investment Viewpoint – July 2013

 

1st Quarter 2013:  IMVA Investment Viewpoint – April 2013

 

4th Quarter 2012:  IMVA Investment Viewpoint – January 2013

 

3rd Quarter 2012:  IMVA Investment Viewpoint – October 2012

 

2nd Quarter 2012:  IMVA Investment Viewpoint – July 2012

 

1st Quarter 2012:  IMVA Investment Viewpoint – April 2012

 

4th Quarter 2011

Summary:The Wall Of Worry

    • Entering the fourth quarter, worries about the U.S. economy’s backsliding into recession seemed to reach an extreme just as a number of economic reports – retail and auto sales, construction spending, architectural billings, etc. – began to show encouraging data. Since then, U.S. economic results appear to have improved further.
    • Given the FOMC’s recent assessment of the economy, the committee continued to call for loose monetary policy (the target range for the federal funds rate remained at 0% to 0.25%) and the continuation of the Maturity Extension Program (Operation Twist). Presently, the Fed anticipates that economic conditions will warrant these low rates through mid-2013.
    • Currently, the dividend yield of many U.S. companies exceeds the 1.9% yield of the 10-year U.S. Treasury. Furthermore, corporations generally appear to be in the best financial condition in many years. Extremely low interest rates provide corporations with a generationally low cost-of-capital.
    • The probability of finding an immediate and complete solution to Europe’s financial troubles is low. In the interest of helping Europe and the global economy muddle through, 48 central banks around the world have cut interest rates in the past several months. Over the same timeframe, U.S. economic data have improved. The equity markets have responded but remain inexpensive versus historical ranges, in our view.

Download the full Investment Management of Virginia Fourth Quarter Commentary in PDF.

 

3rd Quarter 2011

Summary:The Paradox of Thrift

    • Money appears to be accumulating selectively throughout the financial system. Savings and checking deposits are surging at mid-teens growth rates, and the broad money growth aggregate (MZM) is expanding at a high-teens rate, with the aggregate balance now surpassing $10.5 trillion. Corporations appear to be strengthening their balance sheets as well. Similarly, refinancing by individuals accelerated during the last quarter. Together, these data reflect the ongoing deleveraging process that originated in 2007 and the “paradox of thrift” – as cash piles up throughout the financial system, receiving negative real rates of return, it is not being reinvested in ways that promote economic growth and job creation.
    • Recent equity market “bullishness” registered only 25%, while “bearishness” reflected 48% – quite a change versus earlier readings of 63% and 16%, respectively. Of course, sentiment is viewed as a contrary indicator. Perhaps the most dramatic swing can be seen in the S&P 100 volatility index (VXO), which has surged to an extreme level, matched only three other times over the last twenty-five years. Ultimately, each of these periods/readings reflected attractive equity market values and presaged attractive future market returns. However, in each case, the market’s advance was slow to materialize.
    • Fresh economic results offer glimmers of hope that the current fear and loathing in the markets are overblown. Valuations screen attractively, but improvements in equity prices depend largely on earnings growth. Only a decade ago, exuberant investors, who had high expectations of the “New Paradigm”, seemed happy to pay 30x equity market earnings. Since then, earnings have doubled, dividends have increased, and the market P/E ratio is now only 12x (based on trailing earnings).

Download the full Investment Management of Virginia Third Quarter Commentary in PDF.

 

2nd Quarter 2011

Summary: Navigating The Unexpected

    • A number of unexpected, exogenous shocks arose throughout the first half of 2011 to temper expectations and actual growth trends. On the whole, U.S. economic growth trends remain well below historical norms, particularly in housing and employment, and have been further challenged by the global disruptions of early 2011. Nevertheless, most forecasters anticipate GDP growth’s accelerating into the mid-2% range in the back half of the year.
    • Financial conditions remain extraordinarily accommodative with historically low borrowing rates available to corporations and individuals. Access to credit among individual consumers and small businesses, however, remains more challenging. Nonetheless, household balance sheets appear to be mending; consumer credit quality scores have improved; and, in May, consumer borrowing increased for the eighth consecutive month. As long as economic growth remains sub-par and unemployment remains high, the Fed likely will continue trying to prime the pump with an accommodative policy, based upon artificially low interest rates.
    • With both expected trends and unexpected events constraining global macro-economic growth, economies generally appear to be addressing numerous challenges and stumbling forward. While the stepping-stones toward future growth may appear less neatly arrayed, generally sound management and improving financial strength of corporations likely continued to drive profits to higher levels, albeit at a decelerating rate of growth. Assuming that recent economic trends and anecdotal data remain supportive, then earnings growth should be able to support current market valuations and, furthermore, drive underlying intrinsic values higher into future quarters

Download the full Investment Management of Virginia Second Quarter Commentary in PDF.

 

1st Quarter 2011

Summary: Third Year Challenges

    • Most measures indicate that the U.S. economy is now entering the third year of its advance, perhaps slowing a bit from the recent trend. Equity markets, long seen as a leading indicator of economic activity, generally have moved up, albeit in fits and starts, ahead of the pace of economic expansion. Most economists anticipate that U.S. growth will continue but decelerate into the 2% range by mid-2011.
    • Thus far, the monetary stimulus by the Federal Reserve appears to be achieving its intended results. Equity markets have risen, corporate profits have expanded, business and consumer confidence have moved higher, domestic consumption has improved, capital spending has accelerated, and the unemployment rate has declined. Another intended consequence of quantitative easing was higher inflation. FOMC members are mindful, however, that commodity prices have risen and that global turmoil has increased, driving energy prices higher.
    • Lending conditions appear attractive for both individuals and institutions. Demand for commercial and industrial loans is rising, and large corporations appear to be returning to the commercial paper market. Consumer credit is also expanding, albeit at a more measured pace and with several, unique distinctions.
    • Third-year recovery years often are challenging for the stock market. During the current stage of economic recoveries, market emphasis generally shifts away from the beneficiaries of rapid economic repair, rotating toward businesses that historically have delivered more consistent business performance. Against this backdrop, we believe equities remain attractive for the long-term, especially when comparing total return potential with that of fixed income alternatives. We do, however, anticipate greater volatility

Download the full Investment Management of Virginia First Quarter Commentary in PDF.

 

4th Quarter 2010

Summary: In Search of Goldilocks

    • U.S. economic growth has turned positive, but it remains below trend and reflects high unemployment, portending low interest rates for an extended period. Taking from its playbook for 1958, the last time the U.S. faced serious deflationary pressures, the Federal Reserve has instituted aggressive policies that target economic stimulus and a core inflation rate of 1.5%-2.0%.
    • The initial stages of the recovery were largely attributable to an inventory rebuilding cycle, uncharacteristically driven by manufacturing and export orders. More recently, domestic economic growth has accelerated, perhaps moving from recovery into modest expansion.
    • Financial lending conditions remain accommodative for corporations. Even with a sudden upward shift in the yield curve, rates remain below the highs of early 2010. More significantly, as Treasury rates increased, trading among lower quality corporate bonds improved, and spreads versus Treasuries declined, all indicating that an appetite for risk had returned. The combination of a steepening yield curve, declining Treasury spreads, and an increased risk appetite, serve to suggest that Fed policy is working.
    • Current prices for the various S&P indices appear fairly valued. The price-to-earnings multiple for the S&P 500 Index is near its long-term average. Earnings have advanced nicely from the low of 2009, and the S&P 500 Index earnings estimates are expected to rise 14% in 2011. Continued strength in earnings should provide the markets with longer-term strength and support. Moreover, equities appear attractive versus other asset classes, e.g., fixed income.

Download the full Investment Management of Virginia Fourth Quarter Commentary in PDF.

 

3rd Quarter 2010

Summary: Bumping Along The Bottom

  • Household deleveraging has led to increased savings and lower consumption. These responses, though rational long-term objectives, are harmful in the short-term, as one person’s spending is (was) another’s income. As sparse sales have created an abundance of capacity, hiring trends have suffered, and disinflationary, if not deflationary, pressures have arisen.
  • Current financial conditions are extremely accommodative for major corporations. However, for many small businesses, which traditionally borrow from local and regional banks, liquidity remains a challenge.
  • In the most recently reported data by the Fed, both M2 and MZM (Money of Zero Maturity), which are monetary aggregates measuring U.S. money supply, indicate a surge in growth dating back to April of this year. As of September 30, 2010, U.S. money in circulation with no maturity (MZM) has risen to $9.6 trillion.
  • It has been said that the Fed does not create jobs, earnings do. So far, corporate earnings have been advancing, and as of now, indications point to a continuation of rising earnings. The Fed, concerned about a weaker than normal recovery and the prospects of deflation, appears poised for continued accommodation for an extended period.
  • The economic recovery seems to be “bumping along the bottom” with sub-par growth. Some short-term market indicators suggest high odds for a rotation or pause, but longer-term indicators and valuation metrics remain supportive.

Download the full Investment Management of Virginia Third Quarter Commentary in PDF.

 

2nd Quarter 2010

Summary: The Good, the Bad, and the Ugly.

  • The reactions to economic and market news have become somewhat ugly over the past couple of months, as some market participants now are discounting high odds for a “double dip” recession.  The good news is that positive economic growth, albeit subdued growth with a slowing trajectory in the second half of 2010, appears to remain on track.  Presently, we remain in the camp that anticipates a muted, sub-par economic recovery.
  • The character of this economic recovery is significantly different from past recoveries.  Autos, housing, and retail normally lead a recovery, backed by strong, pent-up, domestic demand.  Currently, however, U.S. economic growth is being driven broadly by manufacturing-led and export-oriented trends with a below-average revival in domestic final sales.
  • For the most part, financial conditions remain accommodative for global corporations.  Ironically, events in Europe have produced a “flight to quality” in both the U.S. Treasury and corporate bond markets.  Since early April, the yield on the 10-year U.S. Treasury has declined to 2.93%.  Domestic, investment grade, corporate bond yields have followed suit, lowering the cost-of-capital for corporations.
  • On a price-to-earnings basis, we believe that equity valuations may represent among the best opportunities in twenty years, excluding the market bottom of 2009.  The trailing twelve-month earnings yield (earnings/price) on the S&P 500 Index is 7%.  When compared to the 10-year U.S. Treasury rate of 2.93%, equities appear to represent the best comparative value in more than thirty years.  The key determinant, however, will be earnings growth, which needs to continue for these valuation levels to be proven “attractive.”

Download the full Investment Management of Virginia Second Quarter Commentary in PDF.

 

1st Quarter 2010

Summary: Climbing The Wall.

  • The U.S. economy has delivered two consecutive quarters of positive Real GDP growth. Robust export orders and inventory restocking have driven this growth. Still, various concerns persist, and a “Wall of Worry” remains in place. Nevertheless, growth is expected to continue, albeit at a below trend pace.
  • Financial conditions are accommodation, as indicated by spreads in the credit markets. The commercial paper market has shown signs of improved health, and even sub-prime mortgage debt instruments have exhibited improved pricing strength. However, most of the Federal Reserve’s stimulus programs have now come to an end, and the Fed is weighing various options for withdrawing excess stimulus. Trends related to these measures would imply that the Fed has good reasons for withdrawing stimulus at a measured pace.
  • Technical and sentiment indicators reflect short-term “overbought” conditions within the equity markets. Longer-term measures remain constructive. Ultimately, the current upward bias could prevail as long as improving economic and corporate growth, rising earnings, and rising earnings estimates continue. Thus far, the corporate profits/earnings recovery has been progressing at a healthy trajectory.We view current economic/market conditions as generally positive, and we remain optimistic. Real growth has returned to the economy, and corporate sales and earnings continue to improve. The steepening of the U.S. Treasury yield curve continues to signal stronger growth, and assuming modest inflation in the future, conditions may remain favorable. A hand-off of the Fed’s monetary support to self-sustaining, financial intermediaries would be the next step toward health in the economy and markets.

Download the full Investment Management of Virginia First Quarter Commentary in PDF.

 

 

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