Team Yanny or Team Laurel. I think we all have chosen our team on this controversy.   It turns out both teams are right, it just depends on frequency.  All of us have disparate ear mechanics and we can hear frequencies differently.  There could also be a bit of nudging.  When your brain is unsure of something it will pull in surrounding cues, maybe a conversation about one or the other.  The brain is malleable.

Our economy is asking the question; growing or slowing.  All of the research says it could be either, it depends on frequencies.  Tune in.

Earnings

As reported by Thomson Reuters, the S&P 500 posted earnings growth to-date of 26%, which is above the 16% expected coming into the earnings season.  May has come to an end and the S&P 500 closed roughly where it began the year.  Some companies have enjoyed the best growth in seven years and eighty percent beat their forecasts.  That is one frequency.  The other is that this may be too good to be repeated and the buzz is that this could be  “peak earnings.”  One example is Caterpillar.  They delivered superb earnings, but warned that the earnings will be “the high watermark.”

Debt

Total consumer debt has increased.  Currently, 67% is in mortgages, 10% in student loans, 9% auto loans, 6% credit cards, and 8% other.  Debt does grow with time, inflation and population growth, so that is not totally alarming.  The largest portion of the debt, mortgages, were taken out by creditworthy individuals (as compared to 2003-2008).  The downside to the debt story is, 10% of student loans are currently delinquent.  Additionally, as you will see below, credit cards and auto loans have seen increases in delinquent accounts

Miscellaneous

Bloomberg reported that the March daily trades from just E*Trade and TD Ameritrade accounted for more than a quarter of the volume on the New York Stock Exchange.  This says the small investor has finally shown up to the party.  The problem is, these investors have concentrated their efforts, pushing up the value in FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks.  Historically, the small investor tends to run when volatility increases, which can amplify the move.  Also, small investors entering the market tends to a contrary indicator.

Art indicator?  The chart below is for the price action of Sotheby’s (BID) since 2000.  The stock for the auctioneer tends to peak at economic peaks (or bubbles).  Going down the line, starting at the far left, we have the 2000 internet crash, the great recalibration of 2007, European debt crisis of 2011, and finally the sell-off into the 2016 election.  Sotheby’s is making new highs which does not mean the end is near, it is merely a signpost.  Frequency with a bit of static.  The uber-wealthy are happy and spending on another frequency, as we saw in May when Sotheby’s auctioned off a Modigliani for a record $157 million.

Sotheby (BID)

Mortgage Rates

We have seen rates tick up a bit, but still historically low.  Assuming you desire a million-dollar mortgage, a move from 3.5% to 4.5% would increase your payment by an additional $6,000 per year with a 15-year loan.  A 30-year loan would cost you an additional $6,900 per year.  This may not change your decision to buy, but it could certainly curtail purchase of home-related items; paint, furniture, concrete, bricks, carpet, etc.  Rates at this level may not kill the housing market, but we could see the ancillary business slow.  On the positive side, Congress voted (and Trump signed) legislation to roll back parts of Dodd-Frank that created restrictions on community banks.  The smaller banks can get back in the game, which could help business owners (and others) that can’t always show consistent income.

What’s your frequency Kenneth

Yanny or Laurel; Slowing or Growing.  These will be ongoing debates for 2018.  As allocators of capital, we are tuning in to see which frequency rings louder.  As we have said before, we do not see a slowdown (recession) in 2018, but many people we talk with from many different industries are starting to notice a change in frequency.  We caution our clients on timing the market.  The late stages of a bull market tend to be volatile, but research has shown the annualized gains average 19% in the two years prior to a bear market (caveat:  History does not predict the future). For those that have been piling into FAANG stocks, profits are good especially if you realize them.  Netflix is selling at a 281 price to earnings ratio, the S&P 500 is selling at roughly 16…vastly different frequencies.  We are happy that our clients are investors and not speculators.  We have made a plan and we will continue to work that plan.  Happy early Father’s Day.

Sincerely,

Morgan R. Christen, CFA, CFP^®, MBA, CDFA
Chief Executive Officer

Disclosures

* Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.  Debt and mortgage charts courtesy of the New York Fed, newyorkfed.org.  Primary Mortgage Market Survey courtesy of Freddie Mac freddiemac.com.  Sotheby’s chart courtesy of bigcharts.com