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Market Insights & Commentary – December 2019

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Market Insights & Commentary – December 2019

2019 was an anomaly because almost all asset classes delivered returns above their 10-year averages. Historically, stocks perform better when the economy is expanding and bonds perform better when the economy is contracting. Despite the lack of drama in the U.S. equity markets, behind the scenes many factors shifted the trajectory of the global economy.

Global Economy:

The Trade War, Brexit, and global monetary policy ruled the headlines in 2019. The tensions between China and the U.S. caused a slowdown in the Chinese economy and a great deal of uncertainty in the U.S. stock market over the last 18 months. As of December 13th, President Trump has agreed to the first phase of a trade deal with China, which will roll back some existing tariffs. The deal is only the first phase, but it could help ease tensions and alleviate China’s struggling economy.
Britain has officially voted to leave the European Union. Brexit has been the center of many debates since the original referendum in 2016, but has now reached an answer. Britain must now navigate leaving the E.U., while also balancing a fragile economy.
Interest rates have dropped below zero in many European countries, as well as Japan, in efforts to encourage people to spend their hard-earned money and support their individual economies. Unfortunately, this strategy hasn’t been able to push the economies out of the later stage of the cycle and the E.U. continues to slow.

The U.S. Economy:

You wouldn’t know it by looking at the stock market, but the U.S. economy is cooling off. The economy is near the end of the business cycle, but it is still being supported by consumer spending and low unemployment rates. Corporate earnings have continued to grow, but at a slower rate. The Federal Reserve joined the international trend of lowering interest rates throughout 2019, after raising rates four times in 2018. Lowering rates boosted bond prices and created an environment where U.S. bonds and stocks were both positive for the year. The interest rate movements also created an inverted yield curve. An inverted yield curve happens when shorter term rates are higher than longer term rates. For example, the yield on a 10-year Treasury dropped below the yield of a 3-month Treasury. Monitoring the yield curve is important because it can be a sign of a weakening economy and a future recession. The yield curve has since rebounded and is no longer inverted.

What to Expect for 2020:

The markets always come with their fair share of unknowns, but investors can expect a few changes in 2020. The Federal Reserve will most likely be less active than what we have seen in the last 2 years. After 4 rate hikes in 2018 and 3 rate cuts in 2019, the Fed will probably take a back seat in 2020. The U.S. is currently in the slowdown phase of the business cycle which tends to be when we see increased volatility in the stock market. The Presidential Election of 2020 will only add to the expected volatility. On a global scale, international stocks are priced below historical averages, but will be impacted by Brexit, the Trade War and the much needed reacceleration of economic growth (or lack thereof). To conclude, 2019 was an anomaly both for stocks and bonds. Recession fears for 2020 have faded, tensions with China have eased and The Federal Reserve may have an uneventful year. Regardless of what’s happened and what’s yet to come, we believe portfolio diversification, understanding your risk tolerance, and talking to your financial advisor should be on your list of things to do in the New Year.

Inside the Economy with SH&J: What will 2020 Bring?

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On this week’s Inside the Economy, we discuss where Americans are leveraging debt and creating wealth. We know a college education is more expensive than ever, so how has this impacted student loan debt? Where is a majority of U.S. wealth held; stocks, real estate or bonds? The S&P 500 has been in the longest running bull market for the last 10 years without seeing a bear market. Will this trend continue into 2020? Tune in to find out!


Inside the Economy with SH&J: A Focus on the U.S. Economy

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On this week’s Inside the Economy, we discuss many facets of the U.S. economy, including the consumer, manufacturing, and debt situation. The average U.S. household holds less debt versus the historical average. What are consumers doing with the extra cash? As the global economy continues to slow, what effect does this have on U.S. exports? What does the decline in global car sales tell us about the broader world economy? We also take a look at the breakdown of U.S. government debt and its sustainability. Tune in to hear about all of this and more!


Value vs Growth Investing

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Value vs Growth

When it comes to investing in stocks, there are many different approaches. Two popular styles are value and growth investing. While both styles seek to take advantage of capital appreciation over time, they go about finding which stocks to buy in a very different manner.

There are many methods to determine the fair price of a particular stock. When you buy a stock, you are buying a share of the future earnings of that particular company. One metric that is often used to analyze stocks is called the Price-to-Earnings (P/E) ratio. This ratio tells us how much a shareholder is willing to pay per dollar or earnings for a company. A higher PE ratio means a more expensive stock, and a lower PE ratio signals a cheaper stock.

Growth stocks typically have higher PE ratios than their peers. The reason is they have exhibited higher-than-average earnings growth, and are expected to continue on this high growth trend. Growth investors believe these stocks have higher earnings potential, and are willing to pay more for them. Growth stocks are more volatile than the broader market, meaning they are more sensitive to market shocks.

Value stocks typically have lower PE ratios than their peers. Value investors seek stocks that have experienced poor price performance, but still have strong fundamentals. The goal of value investing is to buy stocks cheaper than the broader market, and experience capital appreciation once the market realizes the fair value of the stock is higher than when it was originally purchased. Value stocks are typically less volatile than the broad market.

Which is Better?

Whether you are a value investor or growth investor, you can always find a timeframe where your particular strategy is advantageous. Since the Great Financial Crisis in 2008 and 2009, however, growth has been king. In the 10 years prior to September 2019, the Russell 1000 Growth index gained 14.72% per year, compared to 11.26% per year for the Russell 1000 Value index. The reason for the outperformance of growth has to do with being in the longest economic expansion in U.S. history, as well as one of the longest bull markets. Value investing tends to outperform when the economy starts to contract and enter into a recession.

At Sharkey, Howes & Javer we implement both styles of stock investing. If you want to learn more about these types of equity investing, please get in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.

Inside the Economy with SH&J: Consumer Spending & Global Debt

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On this week’s Inside the Economy, we discuss the recent patterns of the U.S. consumer. More than 70% percent of the U.S. economy is driven by consumer spending. How have lower interest rates this year impacted our spending habits, especially when it comes to housing? Debt seems to be a common four-letter word in the media, but if we break down global debt, is the situation as bad as it seems? Previously we mentioned the transition to alternative energy, but hydrocarbons are not a thing of the past, quite yet! Tune in to hear more!


Inside the Economy with SH&J: Interest Rates

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On this week’s Inside the Economy, we discuss the latest decision from the Federal Reserve to cut rates in October. Is the latest cut a mid-cycle adjustment or has a new trend emerged? How do 30 year mortgages and HELOC’s compare and contrast over time to the fed funds rate and what does it all mean? The yield on the 10-year U.S. treasury is trending towards all-time lows, but it remains much higher than other country’s debt. How can bonds have a negative yield and what are central banks trying to encourage businesses and consumers to do? Lastly, will there be a recession in 2020? Tune in to find out!


ESG Investing 101

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What is ESG Investing

Many people think that ESG investing is simply investing in companies that are more environmentally friendly than a typical company. ESG actually represents more than just sustainable environmental factors. ESG is short for Environmental, Social, and Governance. Companies are assigned scores based on how well they implement policies that excel in these three areas. 

The environmental factor is straightforward. A company with a high environmental rating will display sustainability practices as to not harm the environment, as well as being proactive on issues such as climate change. A company that scores well in the Social factor would exhibit diversity throughout the company, as well as be outspoken on social issues such as human rights and animal welfare. Corporate governance is probably the least well-known factor of the three. Corporate governance reflects how a company is structured. A company that scores well on this factor would exemplify responsible executive compensation and/or above average employee compensation.

Socially Responsible Investing; How do they Differ?

Many people often think ESG and SRI investing are synonymous, but there are some key differences between the two investing styles. First, ESG is a scoring system. Companies are graded on how well they embody the three factors that were discussed in the prior paragraph. SRI uses screens to filter out companies that exhibit certain qualities. For example, if you wanted to own a fund that didn’t own any companies that relied on fossil fuels, this would be an SRI fund. SRI funds can also screen-in companies that engage in a variety of ESG and SRI factors, such as environmental sustainability.,

 How to Invest in an ESG Portfolio

According to the 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends, there was over $12 trillion invested in SRI and ESG strategies in the U.S. alone. This number is only expected to grow over the next decade. The easiest way to implement an ESG portfolio is by using mutual funds and ETFs. Mutual funds that are dedicated to ESG investing have an ESG mandate, meaning they can only select companies that score highly on the ESG scale. These ESG mutual funds typically have higher expense ratios than non-ESG funds due to the extensive screening process. ETFs are a more cost-effective way to invest, as they track various indices. There are now over 1,000 unique ESG indices. 

Sharkey, Howes, Javer has ESG portfolios available to clients. If you would like to learn more about ESG investing and how you can implement a socially-conscious portfolio, please contact us or call 303-639-5100

Inside the Economy with SH&J: The Future of GDP & Fossil Fuels

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On this week’s Inside the Economy, we discuss the continuation of the economic slowdown. The U.S. economy is still growing, but at a slowing rate according to GDP numbers. What can we expect from the Federal Reserve over the next few years and how may that affect GDP? The wavering global economy continues on a path of uncertainty; what part does the U.S. dollar play in the global market volatility? Many of us have seen firsthand the growing presence of wind turbines throughout Colorado, the Midwest and beyond. But what impact are they really having in the energy world? Tune in to find out!

Inside the Economy with SH&J: ISM Numbers & Inflation

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On this week’s Inside the Economy, we discuss the recent ISM (Institute of Supply Management) numbers. The numbers indicate slowing in the U.S. manufacturing sector. Is the rest of the U.S. economy starting to contract as well? What affect does all of this have on worker’s wages? We are now starting to see how tariffs are beginning to impact the U.S. consumer. Will the tariffs have an effect on inflation too? Tune in to find out the answers to these questions and more!

Market Insights & Commentary

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The summer months are a historically dull time in the stock markets. This is a time when many of the powerful fund managers and traders take their vacations and there isn’t a whole lot of activity going on. The summer of 2019 has been different, however, as there have been a multitude of headlines that have moved the markets in both directions.

The topic that has ruled the headlines this summer has been the continuing trade talks with China. All year long there has been constant back and forth between President Trump and President Xi threatening each other’s economies with tariffs. This uncertainty is putting a strain on the global supply chain, causing stock market investors to be weary. The U.S. and China are still in discussions on what a trade deal could look like, but until that comes to fruition expect more ups and downs in global stock markets.

International stocks saw a nice rebound the first 5 months of the year, as the EAFE index (tracks large company stocks in Europe, Australia, Asia, and the Far East) was closely tracking the performance of U.S. markets. There has been a divergence over the past 3 months, however, mainly due to the bleak economic data coming out of the European Union. Europe may already be in a minor recession.

All the chatter surrounding tariffs and a global economic slowdown has seen investors flee for safety this past summer. When investors get spooked by the stock markets, they put their money in long-dated bonds. This demand for longer maturity bonds drives bond prices up, thus lowering the yield. When shorter term bonds are yielding more than longer term bonds, it’s called a yield curve inversion. This inversion has historically been a recessionary signal.

So where do we go from here? When you peel back all of the headlines surrounding the stock market and look at the fundamentals of the U.S. economy, there seems to be no sign of a recession in the near term for the U.S. 75% of S&P 500 companies beat their Q2 earnings estimates, unemployment remains around 4%, and the U.S. Consumer Confidence index remains high. A recession may take up to two years to manifest after an inversion, and on average the stock market advances another 13% before the recession. Going into an election year, these next 3 months are sure to be another bumpy ride in the stock market. As long as investors know how much risk they are taking in their portfolios, no outcome should come as a surprise. Contact Sharkey, Howes & Javer