Hilltop Market Update: 4th Quarter 2017
Welcome to the first series of videos on the Hilltop Views blog! We just held our quarterly investment review and wanted to share what we are seeing in investments around the world. Enjoy watching, and let us know what you think!
Ben Yeager discusses the US – the state of the economy and the market’s recent expansion.
Chris Hostetler and David Wise address the international situation – ever volatile and evolving, foreign stocks come with unique risks and opportunities relative to US stocks.
Rusty Eriksen looks at the bond markets and shares some perspective on Jerome Powell, the nominee to be the next Chairman of the Federal Reserve.
Transcript:
U.S Economy and Markets Transcript
Ben Yeager, CFP(R)
(00:12) Hello, and welcome to the first series of videos for the Hilltop Views blog. I’d like to share some of our thoughts from the latest quarterly Hilltop review of the economy and markets. I’m Ben Yeager and today I’ll summarize our thoughts on the state of the U.S. economy and markets.
(00:24) So far U.S. stocks have appreciated nicely through the end of the third quarter. U.S. Large-Cap stocks have posted gains of 14.2%. Big-Cap stocks have trailed with 11.7% gained, and small- cap stocks followed just behind with gains of 10.9%.
(00:41) The market rally that started in February 2016 has coincided with improvements in many of the U.S. leading economic indicators. As we can see from this next chart, currently seven of the ten leading economic indicators are positives. But, we are very aware of the U.S. equity valuations reflected premiums to their historic norms were comforted by the strengthening economic conditions, in addition to significant improvement in earnings growth over the last 18 months.
(01:10) This next slide has the S&P 500 earnings. They have actually kept pace with the price gains that we’ve seen keeping valuations from getting overextended. This was helped by the climb in the dollar, boosting overseas profit and a significant rebound in the energy sector as oil prices improved in 2017 as well.
(01:29) While the U.S. market in general could be considered fully valued, there are several sectors of the U.S. Stock Market that are trading at discounts. We can take a look at this next chart with price to earnings growth numbers for all sectors of the S&P.
(01:46) Most notably, many healthcare stocks are trading at discounts to their historic fair values and position to benefit from the aging population both here in the U.S., but also throughout the world. Many higher dividend paying stocks, such as utilities and telecom sectors, are trading with extreme premiums.
(02:05) Another reason we like healthcare stocks is that they tend to outperform other sectors in the late and recessionary stages in the business cycle. You can see from this next chart, that while economic conditions are strong here and aren’t yet showing any signs of near-term recession, we do believe the U.S. is currently in the mid to late stages of current economic expansion. Finding pockets of strength will be very helpful to minimize the downside risks during these stages.
(02:33) We thank you for watching and appreciate your time. If you have any questions and would like to talk to someone on the Hilltop team please feel free to reach out to us. Thank you!
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International Investments Transcript
Chris Hostetler, CFP(R)
(00:06) Hello! Welcome to the first series of videos for the Hilltop Views Blog. We would like to share some of our thoughts from Hilltop’s 4th-quarter review of the investment markets. I’m Chris Hostetler and today David Wise and I are going to discuss the international equity markets.
(00:20) We believe at Hilltop that 2017 marks a changing of the guard between U.S. and international investments. For years following the financial crisis in 2008, the U.S. market outperformed the international markets pretty consistently. This year however, we’re seeing international equities broadly performing better than the U.S.
(00:39) Let’s look at a chart that illustrates what we’re talking about here: This shows the last 20 years of performance for the U.S. and the international markets, but let’s focus specifically at the trend since 2009. The gray line shows the movement of the US stock market and the purple line represents foreign stocks. Over the last five years in particular, the U.S. markets have substantially outperformed the international markets. We believe that we’re likely to see a reversion to the start mean which translates to latent opportunity in the international markets.
(01:14) If we’re right, then this year’s trend of foreign stocks beating U.S. stocks could continue. Now as we get into this there is one thing that I would like to clarify. We often talk about the international markets as being one asset class, which leads to a risk that we think of them as a uniform investment, but we need to remember that every country’s market is unique.
(01:34) As an example, the outlook for the United Kingdom is quite different from that of the mainland Eurozone right now, primarily because of the transition underway as the UK divorces from Europe. That being said, we do see today a broadly synchronized global expansion underway where most of the world’s economies appear to be growing at the same time. We do believe there is a low risk of recession in most of the international markets as well. Further, we believe we are likely to see higher economic growth in the emerging markets as opposed to the developed markets. And one final important point is that strengthening foreign currencies as we’ve seen this year generally boosts returns for U.S. investors in international stocks. If foreign economies strengthen and their currencies strengthen as a result, you as a U.S. investor could get more dollars back when you sell your investment.
Fundamental Risks in International Equities:
Eurozone
North Korea threats
China slowdown
(02:24) Now, let’s talk about risks in these markets. A big one of course is the political situation in the Eurozone as highlighted by the UK’s vote last year to leave the Eurozone. While the Brexit is a blow to Euro stability, we do not believe that it is an existential threat.
(02:41) I liken the current political situation in Europe to what the U.S. states went through in the early days of the Union. Early on, Americans viewed themselves as citizens of their state, but at some point they began talking about themselves as citizens of the United States. Now, historians will argue about how long this process took, but the key is that it was not certain in the early days that the U.S. would become as cohesive and strong an economic union as it did. It remains to be seen whether Europe will be able to pull off the same feat, but we think we will see further economic consolidation which would generally be a positive economically.
(03:18) Other foreign risks include North Korea. Clearly there is a human risk to the situation there, but we are also monitoring the risk to the financial markets. And China, as China continues to attempt to slow its growth to a more sustainable rate, there continues to be a risk of asset bubbles or a more severe downturn.
(03:39) Now, I’d like to hand the presentation to Dave who will focus on some of the opportunity we see.
Dave Wise, CFP(R)
(03:43) Thanks Chris! So, we’ve really felt that the international equity market has been primed to outperform for some time and when we look generally speaking at a market as it begins to recover, smaller companies actually tend to outperform their larger counterparts, especially when we see domestic demand really drive growth forward. Because we believe we’re headed into this changing of the guard per say as Chris mentioned, where international growth starts to take its course, an opportunity arises within smaller companies in the international market.
International Small Cap Opportunity Key Factors:
Tend to outperform during early stages of a recovery
New growth expectations make valuations more attractive
Cyclical nature promotes additional optimism
Low correlation with other equities improves overall risk within equity allocation
(04:21) I’ve highlighted a few of the key factors that we’re currently looking at in the slide and really the story has been developing over the last year or so, where we see new growth expectation push valuations further and back into attractive territories. When we look at the cyclical nature of the international small companies we actually see further growth potential.
(04:42) So what do I mean when I say “cyclical”? Industrials, technology, real estate sectors and companies that really benefit from a boost in consumer spending and favorable government policies that aid recoveries. And as we see theses domestic economies continue to recover and expand, we think this is a great area moving forward.
(05:03) In addition to this growth story, we feel like international small cap stocks are going to provide additional diversification within a portfolio and they really mesh well with their larger counterparts.
(05:18) So, that wraps up our thoughts on the current opportunity that we see in the International Small Cap space. Now, we won’t go on any specific changes that we’re currently making at this point in time, but through a process we’re always considering the risks and rewards of our decisions and trying to account for them in our portfolios.
(05:36) We want to thank everyone for tuning in to our inaugural series of the Hilltop Views video blog. We’re looking to provide as much content as possible to give you as much insight into our thoughts and decision-making process.
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U.S. Bond Market Transcript
Rusty Erikson, CFP(R)
(00:11) Welcome to the first series of videos for the Hilltop Views blog. We’d love to share with you some of our thoughts from our latest quarterly Hilltop review investment meeting. I’m Rusty Erikson and I’ll be talking about the U.S. Bond market.
(00:23) There really can’t be a discussion of the U.S. Bond market without talking about the Federal Reserve, and the Federal Reserve has been a busy place these days. First, Federal Reserve Chairman Yellen has signaled that the Fed will continue its plan of slow and steady Fed fund rate increases.
(00:39) The Federal Reserve has voted to increase rates twice in 2017. Each an increase of a quarter of a percent and markets are expecting another quarter of a percent increase in December, and two or three more increases in 2018 and 2019. This measured interest rate increase is based on the present health of the U.S. economy, low unemployment, and subdued inflation with the Fed believing that those trends will continue.
(01:06) Second, the Federal Reserve started its well telegraphed plan to slowly shrink its balance sheet. In September of 2008, the Federal Reserve’s balance sheet totaled 905 billion dollars. Through emergency lending and subsequent quantitative easing, the Fed’s balance sheet mushroomed to 4.5 trillion dollars.
(01:30) For the same reasons that the Fed has started to lift the Fed funds rate, the Fed is looking to shift its balance sheet into reverse and start allowing a gradual reduction. Instead of selling bonds, the Fed intends to start the downsizing process by not reinvesting the proceeds as bonds mature.
(01:44) Lastly, President Trump announced that he will nominate Federal Reserve governor Jerome Powell to succeed Chairwoman Yellen when her term expires in February of 2018. It is widely believed that Mr. Powell represents the continuation of the status quo. Both he and Chairman Yellen share similar views on the role of the Federal Reserve, as well as its current policies.
(02:07) Mr. Powell, whose nickname is Jay and is a lawyer by training, was first nominated to the Federal Reserve Board in 2012 by President Obama. Mr. Powell has a reputation amongst friends and co-workers for being quote, “annoyingly normal”. He apparently enjoys riding his bike to work each day, which is about eight miles. He also enjoys playing golf and the guitar, and has the unique ability to repeat people’s sentences backwards to them.
(02:36) I hope you’ve enjoyed this video. I hope you’ve learned a little bit as well. Thank you so much for watching!
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