10-15 Associates

How Much is it Worth?

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What do the S&P 500, the Nasdaq, Russell Wilson (quarterback of the Seahawks), and Dabo Swinney (Clemson football coach) all have in common?

If you guessed that they all set records during the month of April, you are correct. It took almost seven months for the S&P 500 and six months for the Nasdaq to finally set a new closing high. In a V-shaped recovery that started in late December of 2018, after a nearly 20% decline, both major indexes set new records. If you are a football fan, then I assume you heard about the record setting contract signed by Russell Wilson. In keeping with current tech fashion, the 30-year-old announced his contract via Twitter in the middle of the night. His contract, the biggest in NFL history, is worth up to a reported $140 million over the next four years, with $107 million of it guaranteed. This makes the record $92 million contract paid to Dabo Swinney, the biggest in college football history, seem like a bargain.

It seems fitting that April was also the official comeback of Tiger Woods. As recently as 2013, Tiger Woods was ranked third on a Forbes list of “Most Disliked Athletes,” with a 19% approval rating. Even if you are not a fan, if you got to see the Masters live or saw the replay, it is hard to take away from a person that, when asked about advice for people who are struggling, answered, “You always fight. Giving up is never in the equation.”

If these numbers weren’t enough to make you dizzy, looking to the IPO market, we saw that Lyft, which lost nearly a billion dollars in 2018, was valued at over $26 billion when it went public this past month. This will be followed by the debut of Uber, which is estimated to be valued at $120 billion, making it one of the biggest public offerings the market has ever seen. Although revenue for the company topped 11 billion last year, losses were over 1.8 billion, down from the 2.2 billion they lost in 2017. With the shares of Lyft trading well below their initial offering price, investors may view the Uber offering with a little more skepticism. This will set the stage for the likely launch of Airbnb in 2020, a decade-old company that has grown larger than many hotel chains and is actually profitable. The question is, will investors view this as their opportunity to get in on the growth in the future or as other big investors unloading their stakes and getting out?

Records, challenges, perseverance, and numbers that can be difficult to wrap your mind around can all characterize the market we have been in this year. April added to the already incredible start to the year with the S&P tacking on an additional 3.93% for the month, giving a year-to-date return of 17.5%. The Dow Jones Industrial Average added an additional 2.56%, for a total year-to-date of 14%, and the Nasdaq soared to 4.74%, coming in at 22.01% for the year. Only three of the eleven sectors were negative for the month, but all are positive for the year. Treasury yields turned a little higher and eased the fears of a further inverted yield curve. However, at 2.5% for ten-year treasuries, the bond market continues to forecast a different economy than the stock market does. Since 1980, an S&P 500 return of 10% or greater in the January through April period has been followed by solid full year returns in all three of the major averages. The first four months of 2019 has been the best start to the market since the same period in 1987. That was also the only year since 1980 that the balance of the year, after such a strong start, was not positive. Although returns moderated for the second half following such a strong start, the S&P generated an average of 6% for the following eight months of those years.

Bob Doll, the chief equity strategist at Nuveen, summed it up quite simply: “There are more positive than negative surprises and that has given investors a little more confidence.” With recession fears fading, inflation subdued, the Federal Reserve pausing on raising rates, the economy showing some resilience, China-U.S. trade talks progressing, and Brexit having been kicked down the road, investors have a lot to feel confident about. For those worried about earnings season, according to FactSet data, 78% of the S&P companies have reported better than expected earnings for the first quarter. This is helping to draw money off the sidelines as investors fear they are missing out.

Several pieces of key economic data continued to support the markets as we made our way through the month. The surprise for many was the GDP, which showed that the U.S. economy grew at 3.2% in the first quarter. This was all despite the market meltdown in the last quarter of 2018, the longest government shutdown on record, and fears that a recession was near. Although consumer spending rose by only 1.2%, it was offset by a rise in exports, a decline in imports, and higher inventory investments. “While the boost from net trade as well as state and local government spending is unlikely to be repeated in the second quarter, the main message is that private consumption and investment are slowing down only gradually,” said Brian Coulton, chief economist at Fitch Ratings. A solid and growing economy are what we need to see to keep the markets higher, and at the same time, to not reengage the Federal Reserve. Currently, the markets are pricing in about a 65% chance of a rate cut later this year. If the economic data gets very strong, the positive impact of having the Federal Reserve on the sidelines could disappear quickly.

Another source of positive economic data came from the durable goods sector, which are products designed to last at least three years, such as computers and machinery. Orders rose 2.7%, which is the fastest rate in seven months and better than expected. Weak numbers in the prior month had helped to spark fears that the economy was slowing more quickly than originally assumed. In addition to the positive number for March, the February numbers were revised upward as well. More positive news came from the employment numbers. The number of Americans filing applications for unemployment benefits fell to more than a 49.5 year low, pointing to sustained strength in the economy. The Federal Reserve further confirmed the strength of the labor market in their ‘Beige Book,’ citing “modest to moderate growth” in employment throughout a majority of the U.S. central bank’s districts in April. One additional positive data point for the month was the increase in worker productivity, which improved at the best pace in nearly a decade. Productivity often leads to further wage growth and economic expansion, providing one more reason for optimism that the economy still has room to run!

One by one the fears that gripped the markets in December have largely faded. We still do not have a deal with China and Brexit remains delayed but unresolved. The impact of Federal Reserve intervention should be a source for concern; the fact that the economy is growing, we have record low unemployment, housing remains strong, and at the same time some are suggesting that the Federal Reserve should be cutting rates, goes against traditional economic thinking. It creates confusion for markets as to how to interpret the data. Under normal circumstances, continued strong economic data would be considered a positive. In today’s world, strong economic data could reverse the Fed again, changing forward looking assumptions about interest rates. The prospect of much higher rates would likely be negative for the markets. So, do we therefore want a stronger economy? It is a decade since the financial crisis, and we are still learning how to navigate our way back from zero percent interest rates. Investors need to remain diligent, diversified, and patient. As we approach a period of time during the year that there is less data available, it is important to remember that markets often overreact to fragmented information and the difficulty of how it should be interpreted.

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