Hixon Zuercher Capital Management

Fee-only Registered Investment Advisor in Findlay, Ohio 45840

Examining Earnings and Yields – Weekly Update for April 23, 2018

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Stocks posted moderate gains last week, as the S&P 500 added 0.52%, the Dow increased 0.42%, and the NASDAQ rose 0.56%. International stocks in the MSCI EAFE followed suit, gaining 0.41%.

We received numerous new data updates last week, and most provided positive news for the economy. Retail sales, housing starts, and industrial production all beat expectations and increased in March.

Amid last week’s primarily positive data updates, two key occurrences also affected markets:

  1. Corporate earnings
  2. Treasury yields

 A Closer Look

  1. Earnings Season Continued
    As of April 20, about 16% of S&P 500 companies shared their results for the 1st quarter, and over 80% of them beat earnings expectations. However, this solid performance has yet to impress investors. While most companies have exceeded earnings projections, their stocks haven’t reflected the growth.On the other hand, companies that have beaten their sales projections—but missed on earnings-per-share—have dropped an average of 4.4% on their release days.

    Takeaway: So far, corporate earnings are on the rise, but any companies that don’t beat estimates are experiencing considerable stock declines.

  2. Treasury Yields Rose
    The yield on 10-year Treasuries hit 2.96%—the highest point since 2014. At the same time, the 2-year yield climbed to its highest since 2008. When interest rates rise, companies have higher borrowing costs, and bonds become a more enticing alternative to stocks.Some investors are also concerned that the difference between the two Treasuries’ yields is too close. This occurrence, known as a flattening yield curve, can imply that investors are not confident in the long-term economic outlook.

    Takeaway: Rising Treasury rates are worth paying attention to. If they are a symptom of a growing economy, the markets should be able to handle them. However, if questions about economic growth accompany the increases, investors may worry.

What Is Ahead

We are now in earnings season’s busiest week, when more than a third of S&P companies will release their reports. Additionally, on Friday, April 27, the initial estimate of the 1st quarter Gross Domestic Product will come out.

All this information will help deepen our understanding of where the economy stands—and what may lie ahead. If you have any questions about current data or future projections, we are available to talk.

ECONOMIC CALENDAR

Tuesday: New Home Sales, Consumer Confidence
Thursday: Durable Goods Orders, Jobless Claims
Friday: GDP, Employment Cost Index, Consumer Sentiment

 

Earnings Season Begins – Weekly Update for April 16, 2018

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Market volatility continues. Stocks slid on Friday, April 13, but still held on to gains for the week. The S&P 500 increased 1.99%, the Dow added 1.79%, and the NASDAQ was up 2.77%. International stocks in the MSCI EAFE also rose, gaining 1.45%.

Similar to recent weeks, international events continued to sway markets: Concerns about trade disputes affected investor behavior. Meanwhile, escalating conflict in Syria may have weighed on people’s minds.

As we track these developments, we want to share insight about another important occurrence from last week: the beginning of corporate earnings season.

1st Quarter Corporate Earnings Season

  1. Expectations remain very high
    Analysts anticipate a particularly strong earnings season. Thomson Reuters data predicts that S&P 500 companies’ profits were 18.6% higher in the 1st quarter of 2018 than in 2017. If accurate, this increase would be the largest since 2011.
    So far, data seems on track. According to The Earnings Scout, 1st-quarter earnings growth is currently at 26.8%.
  2. Banks outperform but stocks drop
    On Friday, 3 major banks released their reports—and each beat projections for earnings and revenue. Despite this positive news, however, their stocks experienced sizable declines that contributed to overall market losses.
    Why would strong quarterly results create stocks losses?The markets anticipated this positive performance and had already priced it into the shares. As a result, any less-than-ideal news seemed to outweigh the expected earnings and revenue increases. In particular, 2 facts drove losses:
  • 1 bank may have to pay a $1 billion penalty
  • All 3 banks experienced slow loan growth

We are in the early stages of earnings season, and many major corporations still need to release their reports. In the coming weeks, we’ll continue monitoring these developments to better understand our economy. As always, please contact us if you have questions about how the data affects your finances and life.

ECONOMIC CALENDAR

Monday: Retail Sales, Housing Market Index
Tuesday: Housing Starts, Industrial Production
Thursday: Jobless Claims

Stocks Drop as Tariffs Rise – Weekly Update for March 26, 2018

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Markets experienced significant declines last week. The S&P 500 lost 5.95%, the Dow dropped 5.66%, and the NASDAQ declined 6.54%. With these losses, all 3 domestic indexes had their worst weekly performance in more than 2 years. International stocks also declined, with the MSCI EAFE giving back 2.64%.

What caused markets to stumble in this way? While various economic reports came out and the Federal Reserve raised rates again, another topic triggered the declines: trade war concerns.

Weekly Focus: Analyzing Tariffs and Trade Wars

 What happened?

Last week, President Trump approved new tariffs on China as a punishment for taking American intellectual property. The tariffs could affect as much as $60 billion in Chinese imports—and Trump called this the “first of many” trade actions against the country.

China indicated that it may retaliate and is “looking at all options” on how to respond. Apparently, everything is on the table—including targeting 128 American products, no longer purchasing U.S. Treasuries, and taking legal action through the World Trade Organization.

How did investors respond?

The new China-specific tariffs combined with Trump’s steel and aluminum tariffs earlier this month create growing concerns about a trade war. The market declines we experienced last week are largely a reaction to these fears.

What might happen next?

These new tariffs have the potential to create 2 very different results:

  1. A trade war that stifles global growth
  2. A more even playing field for American companies

A trade war: If the U.S. and China go back-and-forth adding punitive tariffs to each other’s products, our economy could suffer. We could experience inflation, slower economic development, and higher interest rates, making expansion and growth harder for U.S. businesses.

A more even playing field: If the tariffs are successful, U.S. industries could benefit. Some U.S. steel producers are already boosting their production and hiring as the first round of tariffs goes into effect.

Where do we go from here?

The potential for a full-blown trade war exists, which could negatively affect the global economy. But this worst-case scenario is far from certain, and many opportunities exist to calm the rising tension. For now, we will continue analyzing exactly what is happening with tariffs and how different countries react.

In the meantime, if you have questions about how these geopolitical changes could affect your financial life, we are always here to talk.

ECONOMIC CALENDAR

Tuesday: Consumer Confidence
Wednesday: GDP, International Trade in Goods
Thursday: Jobless Claims, Consumer Sentiment
Friday: U.S. Markets Closed for Good Friday

A Look Back – Weekly Update for March 19, 2018

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Markets were up on Friday, but domestic stocks lost ground for the week as political turmoil and potential trade wars weighed on investors’ minds. The S&P 500 dropped 1.24%, the Dow gave back 1.54%, and the NASDAQ decreased 1.04%. International stocks in the MSCI EAFE barely avoided losses with a 0.13% gain.

Mixed Performance Results

Overall, we received a variety of mixed data last week:
Down

 Up

But data reports were not the only detail worth noting last week. We also marked the 10-year anniversary of Bear Stearns’ collapse.

A Look Back

For 85 years, Bear Stearns was a respected institution that became one of the world’s largest investment banks. When the housing market crashed in 2007, the firm realized it had taken on far more risk than planned. As a result, the firm ran out of cash, and on March 16, 2008, JPMorgan bought the previously valuable company for only $2 a share. In retrospect, the Bear Stearns’ collapse was the first real glimpse of the pending Great Recession.

Less than a year later, markets hit bottom on March 9, 2009. In the years since, stocks have corrected multiple times, losing over 10%. But, they have never lost 20% to push into a bear market—meaning we’re in the midst of the 2nd-longest bull market since World War II.

Time can make some memories fade, but we doubt that anyone who experienced the Great Recession forgets how challenging and scary it felt.

Here’s what headlines were telling us:

Despite the market losses and economic turmoil, the Great Recession was also a powerful reminder of Warren Buffett’s advice: “Be fearful when others are greedy and greedy when others are fearful.”

While the markets seemed to be in a free-fall, allowing emotion to dictate investing choices was easy. But anyone who escaped the markets’ bottom missed an incredible growth opportunity.

Nine years after the S&P 500 hit its low, the index was up 390%—and was 122% higher than its record close before the Great Recession began. So, while the collapse was painful, stocks weathered the storm, sailing far beyond where they were before. The economy is also in a very different place than it was a decade ago.

Where We Are Now

  • Job Growth: February was the 89th-straight month where the economy added jobs.
  • Unemployment: The current unemployment rate remains at its lowest level in 17 years.
  • Gross Domestic Product: The U.S. economy has expanded every year since 2010.

Of course, we recognize that the economy is not perfect and still has room to improve. But, we also want to remind you of how far we’ve all come since the Great Recession first began. If you’d like to take a closer look at your own progress or plans for the future, we are always here to talk.

ECONOMIC CALENDAR

Wednesday: FOMC Meeting Announcement, Existing Home Sales
Thursday: Jobless Claims
Friday: Durable Goods Orders, New Home Sales

March 2018 Market Update Video

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In this month’s video, I will discuss some of the major headlines that influenced markets in February. I will also provide insight into what these developments could mean for you as an investor.

If you have any questions or concerns about your portfolio after watching this video, or would like a second opinion, please don’t hesitate to reach out to us. You can send us an email, or give us a call at (419) 425-2400. We would be happy to talk with you.

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