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Market – Commentary January 7, 2019

by Jack Reutemann | Jan 7, 2019 | Weekly Stock Market Commentary

Investors will think of the last quarter of 2018 for years to come, but they won’t remember it fondly.
The Economist described it like this, “After a rotten October and limp November, the S&P 500 tumbled in value by 15 percent between November 30th and December 24th. Despite an astonishing bounce of 5 percent the day after Christmas, the index finished the year 6 percent below where it started…”

Last quarter’s volatility and the slide in share prices owed much to uncertainty about economic growth. Investors were concerned about a variety of issues, including:

The Federal Reserve making a mistake. Many in financial markets worried the Fed would raise rates too high, too quickly and stifle economic growth. Last week, the Fed put those fears to rest when its Chair, Jerome Powell, suggested the Fed was willing to stop increasing rates during 2019 if there were signs of economic weakness. Investors rejoiced and the three major U.S. indices experienced significant gains on Friday.
Weaker corporate profits. Companies were remarkably profitable during the first three quarters of 2018, in part because of the boost from tax reform. However, there were worries fourth quarter earnings would be weaker as the effects of the stimulus faded. Last week, John Butters of FactSet reported, after three quarters of 25 percent or higher earnings growth, the estimated earnings growth rate for fourth quarter 2018 is 11.4 percent.
A slowdown in global economic growth. Trade wars and tariffs clouded the outlook for global growth throughout the year. The Economist reported there were signs of economic slowdown in China, and one American technology firm attributed a sharp downturn in its profitability to weaker economic growth in China. There were also signs of economic weakness in Europe.
A slowdown in domestic economic growth. Investors have been worried that trade issues, the government shutdown, and other matters could negatively affect economic growth at home. If the government shutdown is resolved quickly, these worries may prove overblown. Last week, Taylor Telford of the Washington Post reported, “…According to interviews with several analysts: The economy is fundamentally strong, and the stock market has overreacted to concerns about a modest slowing.”

As anxiety rose during the fourth quarter of 2018, some investors rushed to the perceived safety of bonds. High demand pushed the yield on 10-year Treasury bonds lower. It dropped from 2.99 percent to 2.69 percent during December, according to Yahoo! Finance.

While increasing bond exposure may have been a prudent portfolio adjustment for investors who were taking more risk than they could bear, those who moved out of stocks on fear missed out. The Standard & Poor’s 500 Index and the Dow Jones Industrial Average posted their biggest one-day point gains on record on December 26, reported Emily McCormick for Yahoo! Finance.

At this point, some investors feel overwhelmed and worried about their ability to reach personal financial goals. If you’re one of them, please give us a call. Sometimes, reviewing life and financial goals, and the reasoning behind portfolio choices, may be reassuring. We look forward to hearing from you.

What is midwest nice?
The Economist recently explored whether there was a basis for the idea that Americans who live in mid-western states are more congenial than people from other states. The publication explained ‘Midwest nice’ this way, “It is apologizing involuntarily when scooting past someone, both to warn of your presence and to express regret for any inconvenience your mere existence may have caused. It is greeting people as they step into a lift and wishing them well as they leave. It is a strong preference for avoiding confrontation.”
The Economist found it all depends on how you measure ‘nice.’

If the standard is volunteerism, the Corporation for National and Community Service reported three of the five states where people volunteer the most are in the Midwest:
1) Utah (West)
2) Minnesota (Midwest)
3) Wisconsin (Midwest)
4) South Dakota (Midwest)
5) Idaho (West)

If the standard is personality, the Midwest shares the blue ribbon for friendliness. A group of researchers from the United States, Britain, and Finland mapped the psychological topography of the United States and found people in Middle America and the South to be friendly and conventional, while those on the West Coast, in Rocky Mountains, and along the Sunbelt were relaxed and creative. Americans in the Mid-Atlantic and Northeast regions were temperamental and uninhibited.

When it comes to charitable giving, Utah and the Southern states come out on top. Southerners give the highest percentage of earnings to charities. The money primarily goes to churches.

The preponderance of the data considered by The Economist suggest that ‘Midwest nice’ has a basis in reality.

Weekly Focus – Think About It
“The wind comes across the plains not howling but singing. It’s the difference between this wind and its big-city cousins: the full-throated wind of the plains has leeway to seek out the hidden registers of its voice. Where immigrant farmers planted windbreaks a hundred and fifty years ago, it keens in protest; where the young corn shoots up, it whispers as it passes, crossing field after field in its own time, following eastward trends but in no hurry to find open water. You can’t usually see it in paintings, but it’s an important part of the scenery.”
– John Darnielle, Musician and author

Best regards,
John F. Reutemann, Jr., CLU, CFP®

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95 percent of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Sources:
https://www.economist.com/finance-and-economics/2019/01/05/what-the-market-turmoil-means-for-2019
https://www.bloomberg.com/news/articles/2019-01-04/powell-says-fed-ready-to-adjust-policy-if-needed-can-be-patient
https://www.cnn.com/2019/01/04/investing/dow-stock-market-today/index.html
https://www.nytimes.com/2018/12/27/us/politics/trump-tax-cuts-jobs-act.html
https://insight.factset.com/sp-500-2018-earnings-preview-highest-earnings-growth-in-eight-years
https://insight.factset.com/largest-cuts-to-quarterly-sp-500-eps-estimates-since-q3-2017 (download report)
https://www.cnbc.com/2019/01/04/stock-market-comeback-is-now-in-the-hands-of-china-us-trade-talks.html
https://www.washingtonpost.com/business/2019/01/04/stock-market-has-been-going-down-down-down-so-why-do-so-many-analysts-think-itll-go-way-up-this-year/?noredirect=on&utm_term=.59bd81bd0720
https://finance.yahoo.com/quote/%5ETNX/history?p=%5ETNX
https://finance.yahoo.com/news/stock-futures-rise-christmas-eve-sell-off-134312777.html
https://richardlangworth.com/success
https://www.economist.com/graphic-detail/2018/12/27/is-there-any-truth-to-the-idea-of-midwestern-nice
https://www.nationalservice.gov/vcla/state-rankings-volunteer-rate
https://www.apa.org/pubs/journals/releases/psp-a0034434.pdf
https://www.goodreads.com/quotes/tag/midwest

Market Commentary – November 12, 2018

by Jack Reutemann | Nov 12, 2018 | Weekly Stock Market Commentary

How are you feeling about financial markets?
Some votes are still being counted but investors appear to be happy with the outcome of mid-term elections. Major U.S. stock indices in the United States moved higher last week, and the American Association of Individual Investors (AAII) Sentiment Survey reported:
“Optimism among individual investors about the short-term direction of stock prices is above average for just the second time in nine weeks…Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.4 percentage points to 41.3 percent. This is a five-week high. The historical average is 38.5 percent.”

Before you get too excited about the rise in optimism, you should know pessimism also remains at historically high levels. According to AAII: “Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.3 percentage points to 31.2 percent. The drop was not steep enough to prevent pessimism from remaining above its historical average of 30.5 percent for the eighth time in nine weeks.”

So, from a historic perspective, investors are both more bullish and more bearish than average. If Sir John Templeton was correct, the mixed emotions of investors could be good news for stock markets. Templeton reportedly said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

While changes in sentiment are interesting market measurements, they shouldn’t be the only factor that influences investment decision-making. The most important gauge of an individual’s financial success is his or her progress toward achieving personal life goals – and goals change over time.

is A Zeal of zebras a better investment than a blessing of unicorns?
Collective nouns are the names we use to describe collections or significant numbers of people, animals, and other things. The Oxford English Dictionary offered a few examples:

A gaggle of geese
A crash of rhinoceros
A glaring of cats
A stack of librarians
A groove of DJs

In recent years, some investors have shown great interest in blessings of unicorns. ‘Unicorns’ are private, start-up companies that have grown at an accelerated pace and are valued at $1 billion.

In early 2018, estimates suggested there were approximately 135 unicorns in the United States. Will Gornall and Ilya A. Strebulaev took a closer look and found some unicorns were just gussied-up horses, though, according to research published in the Journal of Financial Economics.

The pair developed a financial model for valuing unicorn companies and reported, “After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.”

Clearly, unicorn companies must be thoroughly researched. There is another opportunity Yifat Oron suggested deserves more attention from investors: zebra companies. Oron’s article in Entrepreneur explained: “Zebra companies are characterized by doing real business, not aiming to disrupt current markets, achieving profitability and demonstrating it for a while, and helping to solve a societal problem…zebra companies…are for-profit and for a cause. We think of these businesses as having a ‘double bottom line’ – they’re focused on alleviating social, environmental, or medical challenges while also tending to their own profitability.”

Including both types of companies in a portfolio seems like a reasonable approach.
If you were to choose a collective noun to describe investors, what would it be? An exuberance? A balance? An influence?

Weekly Focus – Think About It
“In his learnings under his brother Mahmoud, he had discovered that long human words rarely changed their meanings, but short words were slippery, changing without a pattern…Short human words were like trying to lift water with a knife.”
–Robert Heinlein, American science fiction writer

Best regards,
John F. Reutemann, Jr., CLU, CFP®

Investment advice offered through Research Financial Strategies, a registered investment advisor.

* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Sources:
https://www.aaii.com/sentimentsurvey
https://www.franklintempleton.com/forms-literature/download/SIRJT-POS
https://blog.oxforddictionaries.com/2014/07/11/what-do-you-call-a-group-of/
https://blog.oxforddictionaries.com/2012/08/09/collective-nouns/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2955455
https://www.entrepreneur.com/article/322407
https://books.google.com/books?id=p9UiDQAAQBAJ&pg=PT194&dq=stranger+in+a+strange+land+Long+human+words&hl=en&sa=X&ved=0ahUKEwjunsfS0MreAhVrQt8KHVkbDbgQ6AEILTAB#v=onepage&q=stranger%20in%20a%20strange%20land%20Long%20human%20words&f=false (Page 167)

How rising interest rates are affecting the markets

by Jack Reutemann | Oct 11, 2018 | Learning

It’s October, which means autumn is upon us. But this year, it’s not just the leaves that are falling. The markets have been falling, too. On Wednesday, October 10, the Dow slid more than 800 points. The S&P 500 fell for the fifth straight day. And the tech-heavy NASDAQ was hit hardest of all, dropping more than 4%.¹ Both the Dow and the S&P continued sliding on Thursday, too.²

It sounds dramatic, but it’s not necessarily cause for alarm. Still, whenever market volatility rears its head, it’s useful to understand why. That’s because the more we understand the why, the less cause we have to fear it.

Before I delve into why, however, let me ask you a question. Do you remember the Greek myth of Theseus and the Minotaur? In the story, Theseus descends into a bewildering labyrinth to fight the half-man, half-bull Minotaur. But to find his way back, Theseus first ties one end of a ball of string to the entrance. Then, after slaying the beast, he follows the unwound string all the way back to the surface.

The reason I mention this story is because sometimes, navigating the markets can feel like wandering through an impenetrable labyrinth. There are so many headlines and narratives, each with their own twists and turns. The good news is that it’s possible to pick up a thread and follow it all the way back to its source, just like Theseus.

A ten-year journey
In this case, follow the thread back to the end of 2008. Seems like a long time ago, doesn’t it? Barack Obama had just been elected president. The academic paper that would lead to the creation of bitcoin had just been published. And people were just beginning to realize how bad the Great Recession would become.
To combat this, the Federal Reserve lowered the federal funds rate to almost zero.³ This is the interest rate that banks pay each other for overnight loans. Their reasoning was simple. By reducing the federal funds rate, banks could afford to lower their own interest rates to customers. Lower interest rates, of course, make it cheaper for businesses and individuals to borrow money, which spurs more investing and spending. This, in turn, could help revive America’s slumping economy. And with millions of jobs lost during the Great Recession, the economy needed all the help it could get.

Rates remained in the basement for years afterwards as the economy embarked on a long, slow healing process. In fact, it wasn’t until 2015 that the Fed finally raised rates at all.⁴

Now follow the string forward to 2018
The Fed has started lifting interest rates at a slightly faster pace in 2018. Recently, on September 26, the central bank announced they would raise the federal funds rate to a new range of 2.0 to 2.25%.5 Officials also suggested they might boost rates once more before the end of the year. It’s the third increase in 2018, and the eighth overall since 2015.

Why are interest rates going up? Because the economy is in a much stronger place!
Unfortunately, with that strength comes the risk of inflation. Inflation is the rate at which prices rise and purchasing power falls. For example, if the rate of inflation is 3%, then a candy bar that costs a dollar one year will cost $1.03 the next. It’s essentially the measure of how valuable your money is. And if inflation goes too high, it can make even basic living costs very expensive.

Historically, inflation goes up when interest rates are low. The Federal Reserve takes the risk of inflation very seriously. In fact, stabilizing inflation is one of the reasons the Fed was created in the first place. So, to prevent the economy from “overheating”, the Fed has slowly raised interest rates. This makes borrowing costlier and reduces spending, forcing the economy – and inflation – to grow at a slower rate.

Whew! Got all that? If so, congratulations! You’ve followed the string all the way back to the surface. We’ve finally reached the present day.

How higher interest rates affects the markets
There’s really no direct link between interest rates and the markets. The effect is more of the “ripple” variety. Despite this, higher interest rates tend to spook investors.
Remember, when the federal funds rate goes up, it costs more for banks to loan each other money. In response, banks raise their own interest rates. This makes borrowing more expensive for businesses and individuals, prompting them to cut back on spending. Less spending for businesses means less investment, less expansion – and less growth. And when investors think a company isn’t growing, they tend not to invest in that company. On the individual side, higher rates can also mean less disposable income for people to spend or invest.

There are other reasons why the markets are struggling. Falling bond prices (which are directly correlated with rising interest rates). Trade tensions between the U.S. and China. Like I said, the markets can be positively labyrinthine. But interest rates are one of the main drivers behind this sudden surge in volatility.
And now you know why.

So where do we go from here?
As important as interest rates are, they’re still just one thread. There are plenty of others that could cause the markets to rise or fall. For instance, a fresh bit of good economic news could transform this week’s fears into last week’s memories. And with the economy as strong as it is, would that really be a surprise?

This is why we don’t overreact whenever the markets lurch one way or the other. You see, when it comes to working toward your goals, we do everything possible not to fall into a labyrinth of twists, turns, and changes in direction. Instead, it’s better to keep things simple. To stay above ground. To follow our own path, not headlines or individual economic indicators.

In the story of Theseus and the Minotaur, Theseus was advised to “go forwards, always down, and never left or right” to reach his goal. The road to your goals isn’t quite so cut-and-dry. But the point is, Theseus had a plan. A strategy. And with the help of ball of string, he never deviated from it.

We also have a strategy: To diversify across a range of asset classes, choose fundamentally sound investments, and invest for the long term, not the short. And while you don’t have a ball of string, you have something even better: A team of experienced professionals dedicated to holding your hand while you work toward your goals.

It’s October. It’s a time for falling leaves, trick or treating, and an endless array of pumpkin flavored beverages. It’s not a time for stressing about the markets. So enjoy the season, remembering that here at Research Financial Strategies, we’ll keep watching Washington, Wall Street, and your portfolio. Every day, every week, every month, and every year. As always, please let us know if you have any questions or concerns. We’re always happy to talk to you! In the meantime, have a great month!

P.S. If you have any friends or family who are concerned about the markets, or don’t have a financial advisor to help them, please feel free to share this letter. Thanks!

Sources:
¹ “Dow falls 832 points in third-worst day by points ever,” CNN Business, October 10, 2018. https://www.cnn.com/2018/10/10/investing/stock-market-today-techs-falling/index.html
² “U.S. Stocks Seek Stability on Heels of Wednesday Rout,” The Wall Street Journal, October 11, 2018. https://www.wsj.com/articles/markets-tumble-across-asia-led-by-tech-as-growth-worries-dominate1539225820?mod=article_inline?mod=hp_lead_pos1
³ “Fed Cuts Key Rate to a Record Low,” The New York Times, December 16, 2008. https://www.nytimes.com/2008/12/17/business/economy/17fed.html
⁴ “Federal Reserve raises interest rates for second time in a decade,” The Washington Post, December 14, 2016. https://www.washingtonpost.com/news/wonk/wp/2016/12/14/federal-reserve-expected-to-announce-higher-interest-ratestoday/?noredirect=on&utm_term=.af1a4b1da520
5 “Fed Raises Interest Rates, Signals One More Increase This Year,” The Wall Street Journal, September 26, 2018. https://www.wsj.com/articles/fed-raises-interest-rates-signals-one-more-increase-this-year-1537984955

Words to Live By #1 – Perseverance

by Jim Streight | Oct 8, 2018 | Learning

A major part of my job – perhaps the most important part – is helping people reach their financial goals in life. Over the course of my career, I’ve discovered that while things like planning, saving, and investing are crucial, it’s equally important to look beyond the numbers. Achievement is about more than just spreadsheets or quarterly statements. It’s about perseverance. Hard work. Willingness to change. Gratitude. Teamwork.
Sometimes, whenever the road to our goals seems long or daunting, it’s good to follow the example of those who came before. So, over the next few months, I would like to share a few quotes that have inspired me in my own personal journey. I call it Words to Live By, and I hope they’ll move you as much as they’ve moved me.

Let’s start with:

Perseverance

What is perseverance?
“Perseverance is failing nineteen times and succeeding the twentieth.” – Julie Andrews “Perseverance is the secret of all triumphs.” – Victor Hugo

I can’t tell you how many times I’ve seen a client work so hard at something, only to come up short. A degree. A promotion. A new job. An award. Retirement. You name it, I’ve seen it. What I can tell you is that the clients who then pick themselves up, dust themselves off, and try again – and who do it every time – are the same ones enjoying their achievements right now. What good does perseverance do?

“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” – John Quincy Adams

In our lives, we will face almost constant obstacles. Financial hardship, poor health, unfortunate circumstances, even other people will stand in the way of who we want to be, where we want to go, and what we want to do.

“A lot of people are going to try to do the same thing you want to do. You just have to decide if you’re one of the people who quits.” – Shea Serrano

The road to our goals will often seem treacherous. The obstacles will seem insurmountable, and the going unbearably slow. But if the destination is what we truly want, it will be worth the mileage. That’s why my favorite quite about perseverance comes from none other than Abraham Lincoln, who said: “I may walk slowly, but I never walk backward.”

As you progress towards your goals in life, always remember that the ability to keep walking, no matter how slowly, is what will get you there. It matters more than talent. It matters more than wealth. Those things can certainly make the road easier. But perseverance is what makes the distance shorter.

Weekly Market Commentary – April 2, 2018

by Jack Reutemann | Apr 2, 2018 | Weekly Stock Market Commentary

In like a lion…
Investors roared into 2018. During the first week of the first quarter of the New Year, the Dow Jones Industrial Average rose above 25,000 for the first time ever. Less than two weeks later, it closed above 26,000. The Standard & Poor’s (S&P) 500 Index and NASDAQ Composite also reached new all-time highs.

Strong performance was supported by strong fundamentals. In December 2017, Mohamed A. El-Erian wrote in BloombergView economic and policy fundamentals, including synchronized global recovery, progress on U.S. tax reform, improved certainty around Brexit, and orderly acceptance of changing U.S. monetary policy, “…reinforce the prospects for better actual and future growth, thereby increasing the possibility of improved fundamentals validating notably elevated asset prices.”

During the first quarter, the global economy remained robust, reported Forbes. American companies were profitable (profitability is measured by earnings) and earnings per share for the S&P 500 Index are expected to increase during 2018. FactSet reported analysts currently estimate the S&P 500 Index will deliver double-digit earnings growth (18.5 percent overall) during 2018. Here’s what the analysts anticipate each quarter:

Q1: Earnings growth of 17.3 percent
Q2: Earnings growth of 19.1 percent
Q3: Earnings growth of 20.9 percent
Q4: Earnings growth of 17.1 percent

Improving expectations for American companies can be credited, in large part, to tax reform, which lowered corporate tax rates significantly. In addition, rising oil prices may help companies in the Energy sector, and rising interest rates may give a boost to companies in the Financials sector.

Despite a robust global economy, strong earnings, and improving earnings per share (EPS) expectations, the major U.S. stock indices delivered negative quarterly returns for the first time since 2015. On March 29, the last trading day of the quarter, the Dow closed at about 24,100. If fundamentals are strong, why did major indices in the United States (and many indices around the world) finish the quarter lower? Financial Times suggested uncertainty might have something to do with the retreat:

“The tax cut has been achieved. We are no longer so sure that [President Trump’s] remaining ideas are so good, and most investors think his ideas about trade are downright terrible. And so the market has started reacting to presidential tweets… Most importantly, though, key assumptions have been stripped away. We can no longer rely on low volatility. And critically, the positive view of a low-inflation strong-growth future has been called into question – but only after the stock market had priced in that assumption as a done deal.”

Market declines may also reflect concern about valuations. One financial professional told Financial Times many asset classes have gone from being very expensive to being expensive. They haven’t yet gotten inexpensive.

Out like a lamb…
The last week of the quarter was a good one for U.S. stock markets, which pushed higher. However, the major indices were unable to overcome deficits accumulated earlier in the quarter. The Dow Jones Industrial Average gained 2.4 percent last week, finishing the quarter down 2.5 percent. The S&P 500 Index was up 2.0 percent last week, down 1.2 percent for the quarter. Likewise, the NASDAQ bounced 1.0 percent last week, but ended the quarter down 2.3 percent, reported Barron’s.

Data as of 3/29/18	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	2.0%	-1.2%	11.9%	8.2%	10.1%	7.2%
Dow Jones Global ex-U.S.	0.6	-1.5	13.6	3.9	3.9	0.6
10-year Treasury Note (Yield Only)	2.7	NA	2.4	2.0	1.8	3.4
Gold (per ounce)	-1.7	2.1	5.8	3.8	-3.5	3.6
Bloomberg Commodity Index	0.0	-0.8	2.4	-4.1	-8.5	-8.0
DJ Equity All REIT Total Return Index	3.7	-6.7	-0.3	2.7	6.7	6.9

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

If you asked Artificial Intelligence (AI) to bake, what would it make? Janelle Shane at PopSci.com wrote, “When computers try to imitate humans, they often get confused. But simulated brain cells in so-called neural networks can mimic our problem-solving skills. An AI will look at a dataset, figure out its governing rules, and use those instructions to make something new. We already employ these bots to recognize faces, drive cars, and caption images for the blind. But can a computer cook?”

Shane addressed the question by training a computer’s neural network to write a recipe. The computer reviewed a dataset of more than 24,000 online recipes (647 of them began with the word chocolate and 8 included blood as an ingredient). After two days of processing, the network delivered a remarkable recipe that includes a title, category, ingredients, and directions, although the nonsensical word choices are likely to leave bakers uncertain about how to proceed:

CHOCOLATE BUTTERBROTH BLACK PUDDING
cheese/eggs
4 oz cocoa; finely ground
1teaspoon butter
½ cup milk
¼ teaspoon pepper
¼ cup rice cream, chopped
1 lb cream
1 sesame peel

– Date Holy –
1 large egg
1 powdered sugar serving barme
¼ cup butter or margarine, melted

Brown sugar, chocolate; baking powder, beer, lemon juice and salt in chunk in greased 9×2 inch cake. Chill until golden brown and bubbly. Place serve garlic half by pieoun on top to make more use bay. Place in frying pan in preheated oven. Sprinkle with fresh parsley for cooking. Eating dish to hect in pot of the oil, pullover half-and half…Yield: 1 cake”

AI seems to have missed an important governing rule for recipes: Instructions should not include unlisted ingredients and all ingredients should be included in the instructions. DATE HOLY is particularly baffling. The author suggested the neural network might have been trying for frosting. It is a cake, after all.

Weekly Focus – Think About It

“We are surrounded by hysteria about the future of artificial intelligence and robotics – hysteria about how powerful they will become, how quickly, and what they will do to jobs…Mistaken predictions lead to fears of things that are not going to happen, whether it’s the wide-scale destruction of jobs, the Singularity, or the advent of AI that has values different from ours and might try to destroy us. We need to push back on these mistakes.”

–Rodney Brooks, Australian robotics entrepreneur

Best regards,
John F. Reutemann, Jr., CLU, CFP®

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Sources:

https://www.barrons.com/articles/dow-25-000-how-high-can-it-go-1515213968

https://www.bloomberg.com/view/articles/2017-12-11/4-developments-to-watch-in-global-economy

https://www.forbes.com/sites/kenrapoza/2018/03/27/sorry-bears-these-big-market-corrections-are-not-evidence-the-end-is-near/#307d2be9fa38