Market Minute - December 10, 2019

by Scott Rosenquist, CFA​

This year is on track to be great for most financial asset classes.  Domestic and foreign equity markets are up double digits through the end of November and the broad fixed income market is up high single digits.  This is almost the exact opposite of what investors saw last year when cash was a top performing asset.

The Federal Reserve’s pivot on interest rates from raising to cutting three times this year along with easing fears of a recession have helped lift markets off the lows witnessed in December of last year.  While this year is not yet over and trade negotiations are ongoing, it’s time to shift our focus forward.   

The chart below from the J.P. Morgan Guide to the Markets shows various valuation metrics of the S&P 500 and where they stand compared to historical averages (as of 11/30/19).  The most used, the forward P/E is just under 18x next year’s earnings estimates.  While above the long-term average, it is not wildly out of the historical range.

MM Chart 2019 09.png

 

Earnings growth for companies in the S&P 500 have declined for the third straight quarter according to Factset.  This is interesting given the significant market returns this year.  The S&P 500 has relied on the expansion of the price to earnings multiple while earnings growth remains negative.  The corporate tax cuts last year have made previous year comparisons difficult to top along with continued trade uncertainty.  Earnings growth is projected for next year although the level of growth is up for debate.

Given the higher valuations in the equity market and low yields available in fixed income, expected future returns over the longer-term should be adjusted to reflect this current environment.  As mentioned in our November Markets Memo, we’ve seen a shift from growth to value-oriented areas of the market these past few months.  Looking forward we continue to maintain a balanced portfolio while seeking pockets of opportunity as we move ahead.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies are revealed, this post is not intended nor does it reflect transactions within any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from accurate sources but is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal.  Past performance is never a guarantee of future results.

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