Disappointment? Really? Is it due to Trade Tariffs or Relative Stock and Market Valuations?
Are the recent trade disputes the reason USA markets are “disappointing” investors? Why are investors saying they are disappointed? We are not sure really. As of Friday the total market is up 6.2% this year which is not far off of the long term average and very close to our estimate for 2018. Are the disappointments more in terms of what people thought could be obtained in 2018? This appears more likely.
Over the past 45 days we have watched large cap stocks advance from 120.5% Fv to 127.9% Fv. At one-point in-between, Fv reached 130.0+ Fv placing largecap stocks as a group, in overvalued territory; expectations appear to be very high. In our opinion, recent disappointment is more about misplaced expectations than true market performance.
SmallCap also advanced slightly by 2.2 points to 125.9% Fv, but Midcap remained unchanged at 121.3% Fv. All three market caps are in Cautionary territory and hopefully, will remain either stable, allowing revenue, earnings and dividends to catch up to expectations, or retreat slightly to more realistic levels.
As mentioned earlier, the total market has advanced 6.2% so far in 2018. It has not been a uniform across the board gain but focused in growth and smallcap stocks. Growth has gained 11.4% while value is basically flat at (0.2)%. Returns are in-sync with expectations. Smallcap has the highest gain with corresponding highest relative valuation. Largecap follows in second place on both measures as does midcap at third. Expectations are following returns.
We are comforted by the fact that markets retreated from higher overvaluation levels to mid and lower cautionary levels. It would be wonderful if valuations would move closer to fair value (100.0% Fv) over the next several months, it would be better for continued market growth. However, that means 6.0% to 7.0% return for the year which does not make us popular, but does support a continuation of what maybe the longest recovery in history. We like the latter personally.
All 11 sectors experienced increases since the last report with 73% now in positive territory after only 36% positive at the time of our last report. The strongest advance of recent is occurring in Healthcare which was one of the most undervalued sectors last year; this is logical. The sector advanced 6.5 points to 7.98% return in 2018. While this is a strong return, it is not the best. That honor goes to Technology posting a gain of 13.3% for 2018 gaining 5 points in the past 45 days.
Only Telecom, Materials and Consumer Staples have not been able to move into the green this year, but all three have made advances toward that goal.
U.S. bonds remain solidly in the red with Investment grade corporates holding 1st place with a loss of 5.3% for 2018. This is better than earlier this year when the loss was 5.7%. Both, investment grade corporates and high yield corporate bonds reduced losses, but remained in the red. All of the other bond categories deepened their losses.
All international markets improved since the last report except for the U.K. which is still embroiled in the uncertainty of BREXIT. The highest gain was made by Mexico as it moved from a negative year-to-date return of (3.92)% to a positive 3.77%. This was an impressive gain for a country plagued with a NAFTA negotiation uncertainty. Mexico also became the only international market to move to the positive side of the isle as everyone else remained more than 1.0% negative. The worst return was awarded to China with a loss of 8.8% moving the last 12 month return into the negative.
International bond markets worsened as all three market areas moved further into negative territory. International corporate bonds remained the most damaged with a loss of 5.1%.
NOTE: The Consideration Directory has been enhanced this month to include 2 sections. The first is similar to the traditional format with stocks sorted by Consideration (Buy, Buy Watch, Hold, Sell Watch, Sell) then categorized by sector and industry group. A new second report has been added with the stocks listed alphabetically. The complete directory can be found in Client Service > World Markets > Americas > USA Stock Consideration Report.