What a difference twelve months can make. A year ago, stocks traded at a reasonable 14x optimistic forward earnings estimates. The S&P 500 Index had just plummeted approximately 19% from its autumn high as the yield curve approached inversion and 82% of corporate CFOs anticipated a recession by 2020. Some of that pessimism proved prescient: Wall Street estimates for 2019 earnings dropped more than 13% during the course of the year and annual profits for the trailing twelve months will likely be flattish. A 30% jump in the forward PE explains almost all of the S&P 500 Index’s 30% advance in 2019. Today, stocks trade above 18x earnings estimates for 2020, which is elevated relative to history.
Investors remain justifiably on recession watch. Inverted yield curves have preceded economic contractions in part because banks have less of an incentive to offer credit. Lower longer term Treasury yields also leave equity portfolio managers with an eerie feeling: why would sophisticated asset allocators eagerly accept such a paltry multi-year return?
Sub-50 Purchasing Manager Indices at home and abroad seem to confirm the signal from the term structure of interest rates. These developments are particularly concerning as they follow five interest rate hikes and the end of quantitative easing by the Federal Reserve. Portfolio managers rightfully wonder if the Fed has classically engineered a downturn in an attempt to avoid anticipated inflation.
Hamlin equity accounts advanced over the last three months. The S&P 500 gained 4.30% during the second quarter as increasing odds of a Federal Reserve interest rate reduction trumped trade war concerns. Our municipal bond portfolios increased in value, benefiting from lower market interest rates and mild spread compression.
We are returning to a “question and answer” format for the summer-time newsletter. We have tried to answer the questions posed most frequently by our clients and business partners over the last few months.
Hamlin equity accounts decreased in value during the fourth quarter. A long-overdue correction in highflying technology growth stocks spread across sectors as investors contemplated the combination of a hawkish Federal Reserve, decelerating global economic data, and plunging oil prices. Hamlin bond accounts fared well as lower Treasury and rated municipal yields offset a moderate widening of high yield spreads.
Hamlin’s equity accounts increased in value over the last three months. The S&P 500 Index returned 7.7% during the third quarter, shrugging off trade war concerns and tightening Federal Reserve monetary policy. Stocks set new records as strong domestic economic activity drove another double digit advance for corporate earnings. Although 10-year Treasury yields increased 20 basis points during the quarter, Hamlin’s high-yield tax exempt bond account values advanced modestly.
Hamlin equity accounts advanced over the last three months. The S&P 500 gained 3.43% during the second quarter, defying skeptics. Stocks celebrated strong Q1 corporate earnings performance, digesting another Federal Reserve rate hike and trade policy uncertainty. We are returning to a “question and answer” format for the summer -time newsletter. We have tried to answer the questions posed most frequently by our clients and business partners over the last few months.
Hamlin equity accounts decreased modestly in value over the last three months as value and income stocks underperformed the broader market for a fifth consecutive quarter. The S&P 500 Index swung from a 7.5% gain in late January to a 10% correction from the highs as inflation, global trade and technology stock jitters overwhelmed steady increases in earnings expectations.
Hamlin equity accounts increased in value over the last three months as the S&P 500 jumped 6.6% in the fourth quarter, celebrating the eventual lowering of corporate tax rates and improving global growth. Treasury yields backed up modestly as bond investors discounted pending fiscal stimulus and a well telegraphed December Federal Funds rate increase. Hamlin high-yield tax exempt municipal portfolios increased in value over the final quarter of 2018.