“Should I stay or should I go now? If I go there will be trouble. An’ if I stay it will be double…this indecision’s buggin’ me”

The Clash (Lyrics)

Summer vacations are over, all are back to work and volatility has returned to the markets. As we wait for another decision from Janet Yellen, (will she stay or will she go now?) asset allocation is a much-discussed topic in the media, the decision to stay or go in U.S. bonds and stocks at the forefront of the conversation. While last week produced some volatility in both, stocks actually finished the week slightly higher as did all but the longest dated bonds. Are asset allocation changes warranted? Maybe, but if last week’s volatility prompts that question, you might want to think about your risk tolerance again.

The U.S. economic landscape hasn’t changed much – slow growth, low inflation, reticent businesses, and an unpredictable consumer. In the short run, all eyes are on the Fed and our Presidential nominees…and apparently oil prices since they are often cited as the culprit for daily stock market gyrations. When it comes down to it, the real villain is a very familiar one – uncertainty. With only three and a half months left to the year, the anticipatory nature of the financial markets should be putting 2016 in the rearview mirror. What should matter now are expectations for 2017 and beyond but analyzing your current holdings with an eye to the long-term is especially challenging now. Looking out several years is essential strategy but ignoring the short-term decisions coming our way may be somewhat Pollyannaish. The outcome of some choices will alter market perceptions, possibly future economic policy and therefore, performance of both the economy and markets.

All our garrulous Fed members seem to relish the spotlight but they can’t seem to agree on an agenda, airing polar opposite opinions on rates and the strength of the U.S. economy almost daily. Consensus in the financial community appears to be that there will be a 25 basis point hike this year, the timing of which is debated daily. Our presidential candidates have seemingly different plans for taxes, spending, foreign policy and most regulatory matters but there are also distressing similarities, most prominently a disdain for free trade. The polls flip-flop weekly, the election seemingly a flip of the coin. Hopefully the upcoming debates will provide some clarity. Investors faced with these political uncertainties and expensive U.S. security valuations may decide that both look vulnerable. Valuations elsewhere seem more attractive, but the conundrum remains that it is difficult to conceive of stabilizing strength abroad absent the same in America.

Economic policy is not our responsibility – thank goodness – but we do exercise management control over investment portfolios, of which stocks are an integral part. Earlier this year, analysts expected earnings growth to resume in the third quarter. Those expectations have been continuously scaled back, and at the end of June were down to an increase of a mere 0.4%, according to FactSet. In the first two months of the third quarter, forecasts were trimmed even further and expectations are now for a decline (yes, again) of 2%. The downward adjustment of approximately 2.5% is a smaller cut than we have seen in recent quarters and hope springs eternal that this will mark the earnings trough. Sales growth may be a leading indicator and is forecast to increase by 2.6% for the current quarter. The Energy sector continues to be the biggest drag on earnings estimates although there has been some appreciation in the commodity price and stock prices. The only sector seeing positive earnings estimate revisions in the third quarter is IT, according to Factset.

We do anticipate that the coming earnings season will follow trend with actual numbers exceeding current estimates. The alternative would be a surprise to investors and, other things being equal, the market adjustment would likely prove difficult – to say the least. If companies have guided earnings lower, so as not to miss market expectations (or to beat) – by how much? Could it be a positive growth number on actual earnings this time around? Perhaps. Consider however, that earnings may take a back seat – maybe a rumble seat – to the looming election and how the Fed answers the question posed by the Clash so many years ago. Personally, we’d prefer they get on with it. 

September 16, 2016

Margarita V. Fernandez

Vice President – Alhambra Investment Partners, LLC

 

“Wealth preservation and accumulation through thoughtful investing.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Margie Fernandez can be reached at:

 

305-233-3774

mfernandez@4kb.d43.myftpupload.com