Investment Spotlight
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® INVESTMENT MANAGEMENT & TRUST SERVICES SPECIALISTS THIRD QUARTER – FALL 2018 INVESTMENT SPOTLIGHT “The longest game in baseball took place at McCoy Stadium on April 18, 1981, lasting 33 innings over eight hours requiring a game halt and restart the following day. The Pawtucket Red Sox edged past the Rochester Red Wings to a 3-2 victory” The stock market continued running during the third ing from the seventh inning stretch. We are quick to quarter, straight through the milestone of the longest follow-up however (with tongue in cheek) that this U.S. equity bull market in recorded history. Now game could very well be poised for extra innings, what? This question, typically in the form of a baseball albeit not to the degree of the “longest game” back in game-inning analogy has been posed to members of 1981. our team numerous times this year. This is certainly apropos with the Red Sox having finished the regu- While this analogy makes for interesting cocktail lar season with the most wins of any team in Major party talk, it requires some elaboration to tie in the League Baseball and playing for another World Series extended economic cycle we are currently enjoying championship once again at the time of this writing. (the second longest in history) with the stock market While we prefer not to speak in absolutes when mak- run and evolving interest rate cycle. Read on for more ing forecasts, when pressed for a number we would detail of the many factors that guide our view. n say that U.S. equities seem to be comfortably emerg- Economic Review & Outlook Gross Domestic Product (GDP) in the U.S. was rock rebuilding in the final quarter of the year. Despite a solid at 4.2% annualized in the second quarter. The slowdown in headline Retail Sales figures released measure of total goods and services produced in in the third quarter, the critical components which the United States was built on a strong foundation comprise the “Control Group” that factor directly of personal consumption up 3.8%, with consumer into GDP (excluding restaurants, autos, gasoline and confidence hitting the highest level since 2000. Small building materials) remain positive. business owners surveyed by the National Federation of Independent Businesses (NFIB) also reported feeling There is no stronger component of the U.S. economy the most optimistic in the history of the survey going at present than employment. National unemployment back to the 1970s. Business Fixed Investment was stands at 3.7%, the lowest since the 1960s. Per the lat- strong at 7.3%, led by structural investment, equip- est Job Openings and Labor Turnover Survey (JOLTS), ment and technological enhancements. While an an- available jobs nualized GDP reading over 4% will be hard to repeat, reached a Keep up with market activity we remain optimistic about the prospects for U.S. new record by visiting economic growth. As expected, we saw impacts in of 7.14mm. www.plimothinvestmentadvisors.com. the third quarter data from the devastation of The hires-to- Our weekly market commentary Hurricane Florence much like past storms. Initial openings ratio can be found at the pullbacks in consumption impacting restaurants and dropped further “Market Commentary” button other discretionary spending are expected to be offset to 0.8, the low- in the lower right hand corner. by purchases related to structural repairs and est data point D i s c i p l i n e D R e s e a R c h • p R u D e n t D e c i s i o n s • D e c i s i v e a c t i o n 1 ® U.S. sanctions against Iran and outages in Venezuela Q3-2018 YTD-2018 would lead to supply shortages. Production in the U.S. has trended upward however, as would be expected Consumer Discretionary 8.18% 20.64% during a period of rising prices, restraining further Consumer Staples 5.70% -3.34% price increases based on the simple law of supply and Energy 0.61% 7.46% demand. Speculators will continually read into global Financials 4.36% 0.09% events, particularly in the always volatile middle east, Healthcare 14.53% 16.63% trying to front run short-term price movements, but the Industrials 10.00% 4.48% longer-term fundamentals don’t point to a continua- Information Technology 8.80% 20.62% tion of a rising price trend in our view. Materials 0.36% -2.73% Telecommunications 9.94% 0.75% Standing in stark contrast to the employment situa- Utilities 2.39% 2.72% tion in the U.S. is housing. The monthly data reports have gone from bad to worse with Existing Home Sales declining and missing estimates for six consecu- in the history of the survey which began in 2001. tive months to lows not seen since November 2015. The reading indicates that the number of unemployed Building Permits and Housing Starts paint a similarly workers is well below unfilled positions. The weak picture on a forward-looking basis. The latest voluntary quit rate climbed to a new high as well and report of new mortgages pulled back by a seasonally wage growth improved at a pace not seen since 2009. adjusted 6%, while refinancing applications fell 9%. Economists continue to wave red flags that such Average 30-year mortgage rates greater than 5% are strength should be expected to lead to a spike in infla- weighing on borrowers. Modest inventory levels of tion, but we interpret the data as squarely in check. lower-end homes available for sale combined with price appreciation well ahead of wage growth are The Federal Reserve’s preferred measure of inflation, ongoing headwinds. It is difficult to see a sustainable Core Personal Consumption Expenditures (PCE), is recovery to housing activity without a meaningful spot on with their target of 2%. The Core Consumer price correction. Price Index (CPI) figures pulled back to 2.2% on a year-on-year basis after creeping higher in prior Despite the challenges within the housing sector, months. The latest headline report at 2.7%, which our near-term outlook for the U.S. economy remains includes food and energy, had modest contraction in positive. The U.S. is leading the developed world in medical costs and apparel prices along with only a growth and stock market returns which we view as slight rise in food costs. Housing and energy prices justified. Budget deficits continue to concern us and stand as the exceptions, rising far faster than other a seemingly endless supply of headlines from components. Washington to around the globe need to be con- sidered. After synthesizing the available sea of data Oil prices spiked during the quarter. OPEC initially points, we remain positive on economic growth based left production steady while traders speculated that on the core fundamental factors we follow closely and discuss regularly. n Bond Market Review & Outlook The Federal Open Market Committee raised the short- in the pipeline for 2019, financial markets volatility is term Fed Funds rate in September by 0.25% to a target likely to be a side product of the Fed’s efforts to keep of 2.00-2.25%. This was the third rate hike in the inflation and growth in check. A continued unwinding calendar year and eighth in the current cycle. It bears of mortgage-backed and Treasury bonds from the Fed mentioning that the Fed Funds Rate now exceeds the balance sheet should further stoke the flame of volatil- Fed’s target rate for inflation of 2%. With a fourth rate ity, acknowledging that with this activity no historical hike in 2018 widely expected and further increases precedent exists. 2 ® Yields on the bellwether 10-Year U.S. Treasury in- creased from 2.86% to 3.06% after reaching an intra- Q3-2018 YTD-2018 day high of 3.11% during the quarter. This level looks Cash: well behind in the rearview mirror at the time of this FTSE 3 Mo. T-Bill Index 0.50% 1.29% writing after having run up to a high of 3.23% since quarter end. The yield on the 2-Year Treasury has more Taxable Fixed Income: than doubled since the time of the U.S. Presidential Barclays US Agg. Bond 0.02% -1.60% election, ending the quarter at 2.80%. Despite some Barclays Govt./Credit Int. 0.21% -0.76% modest steepening during the quarter, the yield curve Barclays Govt./Credit Long -0.47% -5.42% remains flat with the spread between the 2-Year and BofAML High Yield Index 2.44% 2.52% 10-Year Treasury ending September at 0.26%. Tax Exempt Fixed Income: Barclays Muni. 5 Yr. -0.20% 0.10% Returns on fixed income investments have been Barclays Muni. 7 Yr. -0.11% -0.36% lackluster but, given the rising rate environment, have Barclays Muni. TR -0.15% -0.40% performed better than expected. Shorter maturities outperformed longer and higher yielding bonds caught a bid along with other risk assets. pal at maturity as opposed to chasing yields of riskier fixed income investments. We are continuing to focus We continue to believe focusing on high quality on short to intermediate term bonds because the risk corporate bonds will best serve our investors; owning premium to lock up capital with longer maturities bonds with the highest likelihood of return of princi- remains unattractive. n Stock Market Review & Outlook The S&P 500 posted a very solid return in the third Q3-2018 YTD-2018 quarter, up 7.7% for the period, bringing the year-to- date return to 10.6%.