Commentary Archives

Market and Economic Commentary

1st Quarter 2020
Summary: Overview

  • Not long ago, last year’s trade war seemed to be subsiding, central banks had reduced interest rates or otherwise increased monetary support, and that stimulus was showing up in January and February. Employment remained high, manufacturing was improving, and consumers were spending. Overall, the U.S. economy was doing quite well early in 2020.
  • Then Coronavirus, initially mistaken as a “China problem” alone, spread quickly and globally, bringing the (world) economy to a near halt. Save some consumer durables, grocery consumption, and pockets of e-commerce, March data promises to be uniformly bad.
  • The resulting Gordian Knot (isolate versus engage) creates numerous questions which are difficult to answer. How quickly can the economy recover? That depends on the health (and confidence) of its participants. Have consumer and professional habits changed permanently, or will we mostly revert back to normal? Regarding the latter, we suspect that the Coronavirus will simply speed up changes that were already occurring, versus creating wholesale, permanent changes in the way we live and work.
  • In terms of the market, much of the bad news and dire expectations appear to be priced in, at least for now. Depending on the success of social distancing, medical initiatives, and government responses (fiscal, monetary, and other), we are cautiously optimistic that the market can recover further as the economy recovers in the second half of 2020 and beyond.

Download the full report in pdf here: IMVA Investment Review-April 2020

4th Quarter 2019
Summary: Overview

Last year’s trade war caused political uncertainty, erosion of business confidence, and a global manufacturing recession.  To combat the slowdown, numerous central banks reduced interest rates or otherwise increased monetary support over the past six months.  Low inflation gave them cover to do so.  That stimulus seems to be winding its way through the system, and worldwide manufacturing activity seems to be bottoming.

While global trade issues weigh on manufacturing, services and consumer consumption maintain a positive growth trajectory.  With trade deals slowly coming together, some indications in manufacturing reflect potential stabilization and improved, forward growth dynamics.

Market indicators appear healthy after bouncing from oversold conditions in December of 2018.  Technology stocks, as represented by the NASDAQ, are approaching overbought conditions.

Despite the strong market, sentiment indicators are generally still in the “neutral” range.  Individual investor sentiment, as represented by the AAII survey remains well below “greed” readings.  And Put/Call ratios still show investors hedging for downside protection, not speculating on continued higher prices.

The earnings multiple (P/E) for the S&P 500, now 18.3x, stands well above the 5 and 10-year averages.  For 2020, analysts project earnings growth of 9.6% and revenue growth of 5.4%; these assumptions appear to be priced into the market at present.  A high bar has been set.  Actual earnings, along with updated guidance, will tell the tale.

Download the full report in pdf here:IMVA Investment Review-January 2020


3rd Quarter 2019
Summary: Overview

Similar to last quarter, employment trends continue to show signs of peaking or rolling over.  Non-farm employment growth has moderated, and the number of industries hiring new workers may have peaked. Compensation growth looks to be slowing as well.

The consumer appears to be in good shape.  Retail sales, consumer confidence, and personal savings rates are all hovering near recent highs.  As long as the consumer keeps spending, the economy should hold up.

Manufacturing continues to weaken.  The trade war is having the biggest economic impact on this sector.  The combination of rising tariffs and a stronger dollar have depressed exports.  These trends, in turn, have weakened manufacturing output.

The 2 to 10-year stretch of the U.S. Treasury Yield Curve has inverted.  Over the past seven economic cycles, every recession was preceded by an inversion of the curve.  However, the market typically rallied after the initial inversion – and, not all inversions lead to recessions.  Interestingly, the present yield curve has not led to any signs of stress in the banking system.  Banks remain well capitalized and continue to make loans.

The endless discussions about recession and the resultant choppy stock market have made individual investors rather pessimistic.  The number of bulls has fallen to levels where market bottoms typically are formed.  Likewise, an increasing number of individual investors appear overly bearish.  Both of these are contrarian indicators.

Forward earnings estimates for the S&P 500 Index show +2.3% growth for 2019, but the outlook continues to drift lower on concerns of decelerating trade, slowing global macroeconomics, and general uncertainty.  With low growth seemingly inevitable, it puts the onus on companies to maintain their profit margins.

Download the full report in pdf here: IMVA Investment Review-October 2019


2nd Quarter 2019
Summary: Overview

The U.S. economy is healthy but probably has seen the best growth in this economic cycle.  Small business optimism, job openings, and income growth are below their best levels of last year.  Slowing international trade is starting to have a negative effect on the U.S. economy.

Real U.S. GDP growth is forecast to fall below 2.0% in 2020.  As Federal Reserve Chairman Jerome Powell recently pointed out, targeted 2.0% inflation also has become elusive.  The GDP deflator slipped to a mere 0.5% during Q1.  Low inflation at home is driving long-term yields down – as are negative yields abroad.

International trade issues (slowing plus tariff concerns) continue to negatively impact growth and could drive the U.S. into a recession if not resolved this year.  European economic indicators are pointing to a manufacturing recession, and China’s stimulus measures have not yet had a meaningful impact.  The U.S. yield curve reflects these concerns.

Central bankers around the world have acknowledged the worldwide slowdown and are setting the stage for more stimulus measures.  Despite the slowing economic indicators, investors are reminded to not “Fight the Fed” when it is in easing mode.

Decelerating international trade is starting to weigh on earnings growth.  Forward estimates show +3.8% growth for 2019, but the outlook continues to drift lower.  Currently, 2020 earnings are expected to grow +11.0%, but that figure is unrealistic unless international trade picks up.

From a technical perspective, the market has worked off the extreme overbought readings from last quarter.  Investors remain enamored with defensive Utilities, while Industrials and Transportation stocks lag.

Download the full report in pdf here: IMVA Investment Review-July 2019


1st Quarter 2019
Summary: Overview

Domestic and international economies appeared to slow in late 2018 on fears of an impending U.S. Government shutdown, Brexit, and uncertainty related to trade problems/negotiations with China.  Weak data from China compounded these fears, especially among manufacturers.

However, recent data-points and corporate outlooks suggest a modest recovery in the U.S. and global economies heading into Spring.  The U.S. labor market remains strong, housing appears to be picking up with lower interest rates, and the U.S. consumer generally appears to be in good shape.  Recent stimulative measures by the Chinese government have begun to improve the outlook for Asia and Europe.

After signaling as late as November that rate increases would continue, the Federal Reserve made a quick U-turn on rate hikes.  Chairman Powell indicated several times at the beginning of 2019 year that the Federal Reserve may be done with rate increases, at least through the end of the year.  This stance is good news for the markets because it may keep the yield curve from fully inverting.

Forward earnings estimates show growth for 2019 but have been drifting lower on concerns of decelerating global macroeconomics.  Stabilization at this point would represent approximately 4.4% growth for 2019.

Download the full report in pdf here: IMVA Investment Review-April 2019


4th Quarter 2018
Summary: Overview

Economic growth in 2019 is expected to decelerate from 2018 levels but remain above the average for the current cycle. Unemployment levels are at record lows, and job openings continue to increase. Manufacturing and Construction appear relatively healthy. Uncertainty persists due to trade war overhangs. The housing market has remained cool since the summer, with higher absolute prices and higher interest rates crimping affordability in some markets.

The T-Bill/10-year U.S. Treasury spread has narrowed but remains positive, reflecting concern but not stress.

As interest rates have risen, banks have been able to increase loan growth and credit. Ceteris paribus, this trend should help drive growth in 2019 and beyond.

Corporate profit margins and overall profits are expected to continue increasing. Margins have turned down ahead of every recession to date, but that has yet to occur in this cycle. However, 2019 earnings estimates have started to decline.

With the Q4 decline in the equity markets, some measures reflect “oversold” conditions. Sentiment has turned decidedly negative. These conditions can portend a bottoming process, but they are not rules.

A contraction in P/E multiples generally has driven the sell-off. The S&P 500 forward P/E ratio has gone from 18.5x to approximately 15.0x over the course of the year, and it is now near the 10-year average.

Download the full report in pdf here: IMVA Investment Review-January 2019


3rd Quarter 2018
Summary: Overview

Higher Government spending, lower tax rates, increased private sector capital spending, and record employment are all driving U.S. economic growth.  Manufacturing, industrial production and commercial construction remain strong.  Among consumers, incomes, spending and optimism are up.

Solid economic growth, low unemployment, and whiffs of inflation have given the Fed cover to raise rates as it would in a normal cycle.  Given that what we experienced in the Great Recession was anything but normal and that fed funds were at 0.0% not long ago, these data and responses are welcomed.

The yield curve has flattened but remains positively sloping.  Bond yields in the U.S. likely have put in a secular bottom.

The stronger U.S. dollar and recent weakness in international economies may be helping the Fed keep inflation in check, creating a drag on exports.

Equity markets are often challenged during periods of rising inflation and rising interest rates because market earnings multiples contract.

Recent earnings have been exceptional; those for the quarter just ended should be strong as well.  Both the Fed and consensus currently expect strong economic growth and earnings for several more years.  We will be watching earnings closely.

Indicators of the market’s health and investor sentiment appear decidedly neutral.

Download the full report in pdf here: IMVA Investment Review-October 2018

2nd Quarter 2018
Summary: Overview

The U.S. economy continues to advance, with unemployment at decade lows.  Industrial production and productivity continue to increase, and growth in retail sales has appeared (finally).  The Small Business Optimism Index increased in May to the second highest level in the NFIB survey’s 45-year history.

The “Synchronized Global Expansion” may be maturing, with growth in non-U.S. and emerging markets decelerating somewhat.  The trade-weighted U.S. dollar has strengthened, and foreign currencies generally have weakened.

The yield curve (3-month T-bills versus 10-year Treasury notes) has flattened but remains positively sloping.  The U.S. has likely put in a secular bottom in yields.

Federal Reserve Chairman Jerome Powell, recently characterized the U.S. economy as being in “great shape”, reflecting steady growth and modest inflation.  These trends appear to give the Fed more cover to continue raising/”normalizing” interest rates in 2018 and 2019.  Recent activity in the markets suggest that investors are concerned that the Fed could overshoot.

The February 2018 stock market correction reduced investor optimism and P/Es.  We view these developments as positives.

The S&P 500 currently is trading at approximately 16.6x forward estimates, a level that is much closer to the ten-year average, and one that appears to be supported by earnings trends and interest rate policy.  Looking ahead, actual positive earnings and revenue growth is paramount.

Download the full report in pdf here: IMVA Investment Review-July 2018

1st Quarter 2018
Summary: Overview

The U.S. economy is expected to continue growing between 2% and 3% for the foreseeable future.  The unemployment rate has remained around 4%, the lowest rate in 15 years.

Manufacturing has continued to expand in the United States thus far in 2018.  The Institute for Supply Management Index (ISM) recently hit a new high 10-year high.

Strong economic data, along with the prospective impacts of lower taxes and fewer regulations, are leading to high optimism among small businesses, many of whom, per NFIB, had been “standing on the sidelines and not benefiting from the so-called recovery.”

On the heels of good economic data and such optimism, S&P 500 Index company earnings are expected to jump from $132 per share in 2017 to $157 per share in 2018.  Corporate profit margins and overall profits are expected to reach record highs this year.  Concerns over tariffs could moderate this optimism.

The Federal Reserve raised rates four times last year, and it is expected to increase rates at least three times this year.  The yield curve has flattened somewhat but not alarmingly (short rates up, long rates less so).  One of the biggest risks the equity market faces is that the Fed raises rates too quickly or unexpectedly, killing confidence and economic momentum.

The other risk the equity market faces is a slowing global economy.  While the U.S. economy continues to expand, the synchronized global expansion that began in 2012 is now leveling off somewhat.

The recent U.S. equity market correction has returned valuations (P/Es) to more reasonable levels.  Continued economic expansion, accompanied by advances in earnings, would help confirm this trend.

Download the full report in pdf here: IMVA Investment Review-April 2018

4th Quarter 2017
Summary: Overview

The U.S. economy continues to expand at a moderate sub-3% rate driven by a global upturn and the rebound from a manufacturing recession. After three years of flat earnings, S&P 500 companies delivered accelerating earnings in 2017 and appear on track for double-digit growth in 2018.

Economic data from around the world suggest that a synchronized global expansion is continuing. With 30% of aggregated S&P 500 company revenues originating from international markets, the global expansion has provided a favorable tailwind driving revenue and earnings growth for U.S. multinationals.

The manufacturing rebound is expected to continue. The Institute of Supply Management (ISM) Purchasing Manager’s Index (PMI) and Non-Manufacturing Index (NMI) have remained solidly in expansion mode. Strong international markets have helped improve U.S. manufacturing and production trends. Production and utilization are up, and signs of increased capital expenditure plans are apparent.

While economic activity has remained steady, the yield curve (3-month T-bills versus 10-year Treasury notes) has flattened but remains positively sloping. The U.S. might very well have put in a secular bottom in yields.

Despite the strong year in equity markets, the technical indicators do not appear severely overbought.

The main concern for investors remains the overall high valuation of equities. The market is currently trading at the high end of the valuation range. While this is no reason to anticipate a decline, it does mean that the economy and earnings need to continue expanding at a steady pace. Otherwise, valuation multiples will return to the mean via price alone.

Download the full report in pdf here: IMVA Investment Review-January 2018

3rd Quarter 2017
Summary: Overview

After three years of flat earnings, S&P 500 companies now appear to be delivering the best year-over-year earnings growth rate since 2011 and remain on target for double-digit progress in 2017.

The Purchasing Manager’s Index (PMI) and Non-Manufacturing Index (NMI) have made remarkable recoveries from the 2014 energy turndown.

U.S. imports and exports started to improve in early 2016 and have sharply risen. That surge may be moderating but global economic conditions appear to remain healthy.

Economic data from around the world continue to suggest that a broad-based global expansion is continuing. According to The Wall Street Journal, the manufacturing economies of all 45 countries tracked by the OECD (Organization for Economic Co-operation and Development) are on track to advance this year.

The technical conditions of the market remain supportive. The Cumulative Advance/Decline line continues to make new highs along with price, and the market’s overbought condition has been worked off somewhat.

Volatility across asset classes, and especially in equities, has declined and stayed remarkably low YTD. Periods of low volatility are generally linked to the business cycle; low unemployment rates tend to anchor equity volatility.

Download the full report in pdf here: IMVA Investment Review-October 2017

2nd Quarter 2017
Summary: Overview

The U.S. economy continues to expand, albeit at a moderate sub-3% rate, driven by a synchronized global expansion and rebound from a manufacturing recession. Indications do, however, show the probability of hitting a soft-patch, given recent data.

After three years of flat earnings, S&P 500 companies delivered index earnings at the best year-over-year rate since 2011 and are on target for high single-digit to low double-digit 2017 earnings growth.

With 30% of aggregated S&P 500 company revenues originating from international markets, the global expansion has provided a favorable tailwind driving revenue and earnings growth for U.S. multinationals.

The technical condition of the market remains supportive of current prices. The Cumulative Advance/Decline line continues to make new highs along with price. However, the market advance may be ripe for a pause or correction; many stocks screen as overbought presently.

Volatility across assets, and in particular for equities, has declined and stayed remarkably low YTD. Periods of low volatility are generally linked to the business cycle; low unemployment rates tend to anchor equity volatility.

Download the full report in pdf here: IMVA Investment Review – July 2017

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

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

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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