While 2017 was full of frightening headlines and constant bemoaning over both domestic and foreign policy, the market trudged ahead in an exceptionally low-volatility manner. Nothing seemed to matter, whether it was drama from the White House or fears over our relations with international partners. However, 2018 has been a distinctly different environment. After a strong January, the following few months have felt like a roller coaster. Most investors didn’t seem too concerned as they’ve felt that corporate earnings for the first quarter would be stellar, especially now that the new tax rates kicked in in February. In fact, earnings for the S&P 500 constituents were projected to show immense growth. And they have. As of this writing, with 65% of companies in the index reporting, the average of 30% year-over-year earnings growth is the largest increase since the fourth quarter 2010.
So, the high expectations came to fruition. That’s good news for stocks, right? Well, one would think so. Unfortunately, we are seeing somewhat of a “buy the rumor, sell the news” reaction to the earnings reports. For example, both Caterpillar and Amazon sported stellar earnings announcements, well above even the highest expectations, and saw their share prices drop.
What could be holding stocks back at this time is concern that earnings may be peaking this quarter, coupled with growing signs of higher inflation and rising interest rates. Since the stock market is looking into the future, it is not so much concerned with the earnings news of today as it is with what may be coming later in the year. And if slowing earnings were to coincide with higher inflation and interest rates, that could be a recipe for continued choppiness from both stocks and bonds.
Currently, we are in the same trading range that we discussed in the April Market Update. Until stock prices break one way or the other from this range, there can be no bullish or bearish biases applied to the overall market. Within the trading range, though, we like small-cap stocks, growth-oriented stocks (like technology and health care), as well as commodities.
Corporate earnings are telling a positive story right now. If investors remained focused on that factor rather than inflation fears or political news, stocks may be able to get back in an uptrend.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Financial Services Advisory, or any non-investment related content, made reference to directly or indirectly in this newsletter) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions or applicable laws, the content may no longer be reflective of current opinions or positions.
The FSA Safety Net® is designed to represent an exit point for each security within a portfolio and to help reduce losses from sustained drops in the financial markets. The FSA Safety Net® is not effective and will not protect assets in abrupt/sudden market drops. Examples of such occurrences include, but are not limited to, the market crash of October 1987, the market drop in October 1989, the market disruption caused by the terrorist attacks of September 2001, and the flash crash of May 2010. Similar future occurrences could reduce the effectiveness of the FSA Safety Net®. In addition, the FSA Safety Net® will not protect assets in the event mutual fund companies, custodial companies, or the securities exchanges themselves, at their discretion, suspend, disallow, or fail to conduct trades, redemptions, or liquidations.
Inverse/Enhanced investments: FSA may utilize inverse (short) mutual funds and/or exchange-traded investments/funds (ETFs) that are designed to perform in an inverse (opposite) relationship to certain market indices (at a rate of one or more times the inverse result
of the corresponding index). In addition, FSA may also use leveraged (enhanced) mutual funds or ETFs that provide an enhanced relationship to certain market indices (at a rate of more than one times the actual result of the corresponding index). There can be no assurance that any such investment will prove profitable or successful. In light of these enhanced risks/rewards, clients may direct FSA, in writing, not to employ any or all such investments.
Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from FSA.
Financial Services Advisory is neither a law firm, accounting firm nor insurance agency and no portion of this newsletter should be construed as legal, tax, insurance or accounting advice. FSA advisors are not attorneys, accountants, insurance agents or comprehensive financial planners and no portion of its services should be construed as legal, accounting, insurance, or tax advice.
For further details, including FSA’s current Disclosure Brochure discussing our advisory services and fees, please see important disclosures at www.FSAinvest.com/disclosure
. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.
Please remember that it remains your responsibility to advise FSA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.