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STA Weekly Report – U.S. Stocks Rally to an All-Time High

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INSIDE THIS EDITION:
U.S. Stocks Rally to an All-Time High
Russell 2000 Trades Above it’s 200-Day Average
Major Stock Indexes Near Test of 2018 Highs
Corporate Bond IShares Hit New Highs
Portfolio Stress Test
401k Plan Manager*Updated on 12/31/2018

U.S. stocks topped their all-time highs with the S&P 500 index closing at 2933.68 on April 23rd , surpassing its September 2018 record of 2930. Better-than-forecast earnings and positive commentary from CEOs fueled investor’s enthusiasm.

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While U.S. stocks have recouped all losses from the deep market selloff in the last quarter of 2018, many other major world equity indexes are still a long way from their all-time highs, which magnifies the outperformance of domestic stocks over international peers, a persistent trend seen since the end of financial crisis in 2009.  

Among 132 of S&P 500 companies reporting 1Q financial results, about 80% so far have exceeded estimates. However, some analysts are starting to question whether the rally still has legs.

Both quarterly sales growth and earnings growth are the weakest since 2018, although a deceleration in earnings growth can be partially explained by the fading effects of corporate tax cuts.

Source: Bloomberg, STA Wealth Management

Equity analysts have lowered forward earnings estimates, just as global growth slows. Therefore, the recent market rally is largely attributed to an expansion of the forward P/E ratio, rather than earnings growth.

In other words, stocks have become more expensive at their current valuation levels.

The strong year-to-date rally of the technology sector has pushed that sectors’ forward P/E ratio well above its 5-year average.

The relative strength index (RSI) indicates that US stocks are in short-term overbought territory, although we acknowledge that the market has the ability to trend higher still despite the RSI flashing a warning sign.

Compared to stock investors, bond investors seem to hold a more bearish view of macroeconomic fundamentals. The yield on the 10-year Treasury bond is often used as a gauge of the outlook for growth. When bond investors are optimistic on future growth, they demand higher bond yields. As a result, the stock market and bond yields tend to move in tandem.  Intriguingly, this correlation broke in January and has yet to be restored. While the stock market moved higher, bond yields trended lower.

Bond investors are signaling that they see no chance that the Fed continues hiking interest rates. Instead, they are forecasting a 63% probability of a rate cut.

Normally, central banks cut interest rates to stimulate growth during an economic downturn.

Make no mistake, the strong performance of US stocks has been well supported by a combination of better-than-expected corporate earnings growth, a dovish Fed, constructive trade talks, and to some extent, policy accommodation in China. However, all this good news is likely fully baked into stock prices. To extend the rally, markets will need a new catalyst.

The US conference board survey shows that only 37 percent of Americans believe stock prices will increase over the next year, compared with 26 percent who think the level will fall. The 11 percent difference is only half the spread seen in September, when the market hit its prior peak. This tells us that the market is not in a state of euphoria just yet, but it is certainly not cheap anymore. For that reason, caution may be warranted and effective risk management key to success going forward.

Weekly Technical Commentary

Russell 2000 Trades Above It’s 200-Day Average

In the midst of a strong market, small caps are showing a bigger percentage gain than large caps. Chart 1 shows the Russell 2000 Small Cap Index ($RUT) trading above its (red) 200-day moving average.



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The RUT still needs to clear its February/April highs to turn its trend higher. But it’s moving in the right direction. The purple line is a relative strength ratio of the RUT divided by the S&P 500. And it’s been dropping since February as small caps lagged further behind large cap stocks. But the ratio has reached potential support near its December low and may be starting to bounce. That would be logical chart spot for the ratio to start rising. The RUT may start getting some help from a rising dollar which is hitting another high again (upper box). Large cap stock indexes have nearly reached last year’s highs.

Major Stock Indexes Near Test of 2018 Highs

Chart 2 shows the Nasdaq Composite Index trading just shy of last August’s intra-day high of 8133. Chart 3 shows the S&P 500 nearing its all-time intra-day peak at 2940. Chart 4 shows the Dow Industrials nearing their 2018 peak at 27000. Most stock sectors are in the black today with the biggest gains in healthcare, communications, cyclicals, REITs, technology, and industrials. Defensive consumer staples and utilities are lagging behind.  

Corporate Bond IShares Hit New Highs

In another sign of market confidence, corporate investment grade and high yield bonds continue to follow stocks higher. Chart 5 shows the iBoxx High Yield Corporate Bond iShares (HYG)trading at a new record. The lower box shows iBoxx Investment Grade Corporate Bond iShares (LQD) doing the same.

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Mike Smith, President

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)



STA Wealth Management – Portfolio Stress Test
By Scott Bishop, MBA, CPA/PFS, CFP®
Executive VP of Financial Planning

Although the markets have had a nice run since bottoming in March of 2009 (after the 2008 Global Crisis – see chart below), many are feeling that they are due for a correction based on time, valuations, “headline” risks, etc. 

Click Here to Read Full Article



Important Disclosure:
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 STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / 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 and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, 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. STA shall continue to rely on the accuracy of information that you have provided.

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