Investment Commentary & Outlook - October 26, 2018

Our portfolios are now in the midst of another stunning earnings announcement season. Already, better than expected third-quarter earnings have been announced from Intuitive Surgical (ISRG), Netflix (NFLX), PayPal (PYPL), Progressive (PGR), and United Healthcare (UNH). Still, there is another major factor weighing on the overall stock market, namely the mid-term elections. On November 7th, in the wake of the mid-term elections, we expect that the stock market will stage a relief rally when the election is finally over. The stock market hates uncertainty and getting the mid-term election over will mean one less thing to worry about.

That said, there is no doubt that the best time to invest is the week before Thanksgiving. When we gather with friends and family for Thanksgiving, Americans tend to be in very good moods and those good feelings rub off on the stock market. Furthermore, there tends to be year-end pension funding and gifting during that last six weeks of the year that boosts inflows into the stock market. Overall, the stock market is expected to benefit from wave after wave of positive seasonal inflows.

There have been a lot of interest rate fears spooking the stock market, so we would like to discuss the present monetary policy environment. First, the Fed never fights market rates, so if Treasury yields rise, the Federal Open Market Committee (FOMC) will continue to raise key interest rates. Second, the latest FOMC minutes are signaling another key interest rate hike in December, but there is a vocal minority of outspoken doves from the Chicago, Minneapolis, and St. Louis Fed Presidents that does not want to raise key interest rates higher. Third, there are signals that economic growth may be stalling after (1) two lackluster months for retail sales, (2) existing home sales have slowed to the slowest pace in almost three years, and (3) both new home sales as well as building permits have declined in the past 12 months. Fourth, both consumer and wholesale inflation is now decelerating and running below economists’ consensus expectations.

The bottom line is we can finally see the end of the Fed’s key interest rate increases now that retail sales, housing sector, and construction activity appears to be slowing. When Wall Street realizes that the Fed’s interest rate increases will finally be winding down, our Dividend Growth stocks are expected to rally . . . . read more

Download the Market Outlook Letter — October 26, 2018