Nov 22, 2018 Happy Thanksgiving: Charts we are thankful for

We posted five scary charts on Halloween (see here) and wanted to post five charts we are thankful for on Thanksgiving.

 

1) Higher Interest Rates

Higher interest rates was on our list of scary charts as well. It goes to show how financial data, and statistics in general, can be construed positively or negatively depending on how the argument is framed.

The Federal Reserve has been gradually raising interest rates since 2016 after 6 years of 0% rates. The increase in rates is signaling an improvement of economic activity and a path toward a more normal interest rate environment. While higher interest rates may decrease the rate of overall lending and borrowing, and slow down economic activity, higher rates also increase the potential return for bond investors. For example, bond investors are earning over 3% on 10-year U.S. Treasury Bonds for the first time since 2011.

This has positive implications for bond investors because the current starting yield is highly correlated to future bond returns[1]. We expect investors in 10-year U.S. Treasury bonds to earn roughly 3% on their investment vs less than 2% in 2016.

 

2) Record U.S. Corporate Profits and Revenues

U.S. corporate profits and revenues (as measured by the S&P 500 Index) are at record highs[2]. Companies in the S&P 500 have generated profit growth more than 20.0% over the past year thanks in large part to the Tax Cuts and Jobs Act that was passed in early 2018[3]. The strong corporate profits environment reflects higher sales growth and increased efficiencies that have led to higher profit margins and improved economic activity.

Earnings growth peaks are not typically soon followed by recession. In examining, six decades of earnings growth peaks, the historical data suggests that it took an average of about four years from a profit growth peak before the economy slipped into recession. The S&P 500 gained an average of 59% during periods between earnings growth peaks and the start of the next recession[4].

 

3) A record long bull market in US equities

The bull market in U.S. equities (as measured by the S&P 500) began in March of 2009. On August 21, 2018 it became the longest bull market in U.S. history since World War II, surpassing the bull market from 1990 through 2000 in length. It is also the second highest bull market return, only be surpassed by the 1990-2000 bull market[5].

 

4) Low Valuations in non-U.S. stocks

We are thankful for the opportunity to invest in non-U.S. equities at a significant valuation discount to U.S. equities. U.S. equities have outperformed non-U.S. equities significantly over the last 10 years creating a wide valuation gap[6]. Valuations matter because they have a strong correlation to future long-term returns even though they do not tell us anything about returns in the shorter term. Generally, the lower the valuation ratio, the better the future long-term returns[7].

 

5) Our clients

We are very thankful for the opportunity to serve our clients and their families.  Our clients are truly the best!

 

Happy Thanksgiving!

 

 

[1] Research Affiliates based on data from Bloomberg and FactSet as of July, 31, 2017. Proxy: Bloomberg Barclays US Aggregate Bond Index.
[2] Yardeni Research
[3] Yardeni Research
[4] LPL Financial Research
[5] LPL Financial Research
[6] Source: StarCapital, Thomson Reuters Datastream, as of 8/31/2018. The present valuation ratios are market capitalization weighted. PE (Price to Earnings Ratio), PC (Price to Cashflow Ratio) and PS (Price to Sales Ratio) are based on trailing 12-month values. PB (Price to Book Ratio) is based on the most recent company financial statements.
[7] Based on studies by Ned Davis Research, Robert Shiller, Research Affiliates and others
IMPORTANT DISCLOSURES
Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).
This newsletter is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced herein is historical in nature and is not an indication of or a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Your experience may vary according to your individual circumstances and there can be no assurance that LRIA will be able to achieve similar results for all clients in comparable situations or that any particular strategy or investment will prove profitable.   As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.
Stock investing includes numerous specific risks including the fluctuations of dividend, loss of principal, and potential illiquidity of the investment in a falling market. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. This newsletter should not be regarded as a complete analysis of the subjects discussed. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy. The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors. For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.
INDEX DEFINITIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.
The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices of approximately 800 stocks and is designed to measure equity market performance in 23 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, , Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.

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Important Disclosures

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.