Market Commentary

Weekly Market Commentary May 29, 2018

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The Federal Reserve’s latest minutes confirmed expectations the Fed will continue to raise interest rates gradually and members see no reason to deviate from their plan. Oil prices dropped after an extended rally on concerns Russia and OPEC’s supply reduction efforts will wane as prices rise. 

The overall effect on U.S. stocks was modest. The S&P 500 rose 0.3%. Global stocks, as measured by the MSCI ACWI, dropped 0.4% as European stocks declined on political news from Italy and Spain. Bond yields fell on the news from the Fed and the decline in oil prices, pushing prices of existing bonds higher. The Bloomberg BarCap Aggregate Bond Index soared 0.7%.

Key points for the week

  • The Federal Reserve affirmed its outlook for a gradual increase in rates.
  • Oil prices and bond yields fell.
  • Value companies look attractive after a long period of out-performance by growth stocks.

Market Fundamentals

According to Vanguard’s growth and value indices, growth stocks have outperformed value stocks by just more than 6% so far in 2018. This has been the theme for much of the last decade, but we believe that theme will change as investors begin to examine opportunities in value stocks.

Value stocks are generally solid companies in slower growing industries. Investors often pay too much for fast growth and ignore the ability of solid businesses to adapt. While value stocks are present in every sector, financial and energy companies are often classified as value stocks.

Fundamentals are currently improving for value stocks. Financials are likely to benefit from improved margins and increased demand for loans. Even with the recent rally, energy stocks are cheap relative to oil. We also see the potential for mergers and acquisitions to increase as some industries consolidate. The recent changes in the corporate tax code will help value stocks, too.

In spite of all this good news, value stocks are cheaper than normal compared to growth stocks. The above chart shows the percentage of value’s price-to-earnings ratio to growth’s when comparing stocks in the S&P 500. The continued support of growth stocks, whether markets are calm or turbulent, has widened this ratio to the widest levels seen in the last 10 years. We expect the cheap valuations and improved profit outlook to allow value stocks to narrow the gap with growth over the rest of the year.

Fun Story Of The Week

Golden Knights built a Stanley Cup finalist in their first season ever

History was made on May 20, 2018, when the Las Vegas Golden Knights made it to the Stanley Cup finals. This is the Golden Knights’ first year as a team, which makes it the best first-year expansion team ever in all of professional sports. How the owner and management were able to construct a championship team from scratch is truly remarkable. Aided by a few players who’ve had the best season of their lives, that magic formula has positioned the Golden Knights to be the 2018 Stanley Cup champions.

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