What’s on Tap: Unemployment at New Low, Economic Growth Steady

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  • Low Inflation Rate Could Trigger Fed Action

  • Earnings Recession Is Real, But Not Worrisome

  • Braver Capital Webinar: Is the Bond Market Signaling Recession?

  • Keep an Eye on Infrastructure Spending

  • Financial Planning Friday: The Keys to Your Estate Plan

  • Special Report: Presidential Elections and Your Portfolio

  • Looking Ahead to Job Openings and Consumer Credit & Inflation

The unemployment rate touched its lowest level in 50 years (3.6%) in April. Combine that fact with last week’s report showing U.S. GDP increased at an estimated 3.2% annual pace in the first quarter, and the economy looks set to continue on a steady growth path. Is it so surprising the S&P 500 index has fully recovered from the near-bear market of the fourth quarter and ended the month of April at a record high?

For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 13.6% and 17.1%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 12.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index sat at 3.02%, up from earlier this year but down from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 2.8% for the year.

 Low Inflation Rate Could Trigger Fed Action

The Federal Reserve stayed on its own steady course this week, announcing no rate cut. And with the economy showing strong jobs and GDP figures, there appears to be little need for central bankers to goose growth. But there is one number among the recent bevy of economic data that is a potential concern: Inflation.

 Inflation has been falling since its most recent peak in July of last year. July 2018 was the only month that core personal consumption expenditures (PCE), the Fed’s preferred measure of inflation, clocked in above 2.00% year-over-year since April 2012. Through March, core PCE is running at just 1.55%.

Note: Chart shows year-over-year percent change in the personal consumption expenditures index excluding food and energy (core PCE).  Source: U.S. Bureau of Economic Analysis.

Note: Chart shows year-over-year percent change in the personal consumption expenditures index excluding food and energy (core PCE).

Source: U.S. Bureau of Economic Analysis.

Fed Chairman Jerome Powell argued in his press conference this week that low inflation is transitory. But inflation, measured by core PCE, has been running below 3.00% on a year-over-year basis since the early 1990s. Of course, there are multiple inflation gauges one can point to—the commonly quoted core consumer price index (CPI), for example, was 2.04% in March—but they all suggest that prices are not increasing at a rampant pace. To that point, core PCE has averaged 1.97% since the end of 1989, and has averaged 1.57% a year since the end of the financial crisis in March 2009.

Despite the relatively strong growth figures, if inflation continues to decline, it could be a trigger for the Fed to reverse course and lower the fed funds rate. Look for inflation to become a bigger topic of conversation in the coming weeks.

Earnings Recession Is Real, But Not Worrisome

Is the economy in an “earnings recession”? Perhaps. Should investors be worried? Perhaps not.

With over 60% of S&P 500 companies having reported, first-quarter earnings growth rates are expected to be negative when all the numbers are finally in. If the trend holds and second-quarter earnings growth is also in the red, then we’ll have our earnings recession.

Combined with the partial yield curve inversion, the likely earnings recession has increased the chatter that the overall economy may be headed for a recession as well. But there’s good reason to think that’s not so.

The earnings situation in 2019 looks a lot different from 2015’s earnings recession, when year-over-year earnings growth rates for S&P 500 companies were negative for five consecutive quarters. At the time, Wall Street’s worry was that the U.S. was on the verge of a full-blown recession as economic growth slowed to a rate just above 1%. In contrast, in the first quarter of 2019, the economy was still growing at the healthy 3.2% annualized pace mentioned above. 

The chart below comparing year-over-year year revenue growth and earnings-per-share growth rates of S&P 500 companies over the past seven years also spotlights some key differences. In 2015 and 2016, revenues were falling along with earnings. Today, analysts estimate that revenues for S&P 500 companies will grow 5.1% and 4.5% over the first two quarters of 2019.

Note: 2019 data is based on forward-looking estimates of earnings and revenues.  Source: FactSet.

Note: 2019 data is based on forward-looking estimates of earnings and revenues.

Source: FactSet.

You may well wonder: If the economy and revenues are still growing, how can we be headed for an earnings recession at all? It’s all in the accounting, and revenues don’t tell us anything about the cost side of the equation. So, though companies are selling more stuff, costs have also increased this year.

If we continue to see strong GDP numbers, growing revenues and strong core profitability, earnings growth should catch up with revenue growth rates later in the year.

Braver Capital Webinar: Is the Bond Market Signaling Recession?

Earlier this week, we hosted our quarterly webinar, Is the Bond Market Signaling Recession? In our quick-hitting look at the state of the markets, Portfolio Manager Steve Johnson, Chief Investment Strategist Charlie Toole and Equity Research Analyst Kate Austin discussed the strong performance of both equities and high-yield bonds to start the year, as well as China’s recovery and its impact on global markets.

They also answered clients' questions on the state of the markets, including: The chances of an earnings recession, and what an inverted yield curve could mean for the markets.

Please click here to view a replay of Is the Bond Market Signaling Recession? . We hope you can join us next time!

Keep an Eye on Infrastructure Spending

Political chatter is rising in volume as campaign season gets underway, but amid all the puffery there is one trend worth paying attention to: Talk of increased infrastructure spending. Both sides of the aisle can get behind a sizable infrastructure spending commitment if only to demonstrate that they can accomplish something that is both positive and campaign-worthy.

While it’s way too early to identify any investment moves one can make based on this possible course of events, it’s one we’ll be watching closely. 

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Financial Planning Friday

The Keys to Your Estate Plan

Your estate plan is key. Yet, even those of us confident managing our finances may be a bit daunted by the prospect of determining who gets our money, when and how. But a well-crafted estate plan is a core component of a solid financial plan—and while the process may sound complex, it doesn’t have to be.

For many people, assembling just five key documents will be enough to build an estate plan (six, for new parents). These essentials typically include:

1. A Will. Describes how your property is to be distributed at your passing.

2. Trust(s). Legal vehicles for holding your assets; they are often used to avoid probate. 

3. A Durable Power of Attorney. The authority for someone other than you to handle your finances and property should you become incapacitated. 

4. Beneficiary Designation(s). Your choices for who will receive the assets in your investment account, such as a retirement account, after your death. Note that these designations supersede directions laid out in your will

5. Health Care Proxy/Advanced Directive(s). Names the person who can make health care decisions on your behalf if you are unable to do so. In certain states, a separate document is required to specify how you would like your end-of-life care to be handled.

Parents of young children will also need: 

6. Guardianship Designation. Who you’d like to care for your children in the event of your death. 

One final thing to note: Like financial plans, estate plans should not be static. We recommend a comprehensive review every five years to ensure your plan and your wishes are still aligned. You should also give your plan a review when these events occur:

  • A major life change (new child/grandchild, child/grandchild turning 18, marriage or divorce, death in the family, move to a new state, starting a new business) 

  • A significant increase or decrease in your assets

  • A change in state or federal law that impacts your plan

  • Any time you’ve changed your mind about anything important in your plan (beneficiaries, executors or trustees, for example)

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Special Report: Presidential Elections and Your Portfolio

 The primary-to-presidency campaign is, as always, provoking concern about our country’s future. But from an investing standpoint, our research shows that you can mostly ignore the lofty oratory leading up to and through the election’s outcome in 2020.

Focus on Market Cycles, Not Election Cycles, available from our parent company Adviser Investments, compares investment returns during each party’s time in office. We cover how markets perform in a president’s first year, average four-year returns under Democratic and Republican administrations and the impact of political rhetoric on market volatility.

It’s never too soon to learn more about the impact of politics on your investment portfolio. Download Focus on Market Cycles, Not Election Cycles today!

Looking Ahead to Job Openings and Consumer Credit & Inflation

This week’s flood of economic reports will be followed by a relative drought next week. That said, we expect to get figures on job openings, consumer credit and inflation (CPI). Data-light weeks mean markets may be more prone to react strongly to headlines, with D.C. politics and perceptions of U.S.-China trade negotiations likely themes.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, May 3, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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