September is considered the worst month for stock returns. The average return for the S&P 500 index for September is -0.7% (Since 1950). Additionally, recent negative news could affect stocks – Hurricanes Harvey and Irma, debt limit talks (delayed until December), North Korea nuclear tests and more Washington gridlock. The strong stock market optimism from the beginning of this year has faded pulled back. Finally, stock market valuations are above average, so what goes up must come down, right?
We can’t predict markets, but a sustained bear market is not our base case. Most bear markets are accompanied by a recession and current indicators of the economy show that we are still in a modest and steady expansion. The market’s performance this year has been driven more by strong earnings and economic strength than the promise of stimulus from President Trump’s agenda. This year has been a good reminder that politics makes for good headlines and feverish emotions, but policy change in Washington moves slowly. Additionally, most of President Trump’s executive changes are expected to have a small economic impact.
The US economy expanded 3.0% in the second quarter and is on track for 2.2% to 2.9% growth for the third quarter. While not explosive, the growth is stable and steady. Given demographics and working age population change, this level of growth is about as good as it gets. Company earnings and revenue growth have been excellent in Q2 up 10.3% and 5.2%, respectively. The global economy is expanding, too. This year Global PMIs showed a synchronized uptrend, something which has not happened since 2010. Even Japan has surprised to the upside with GDP growth of 2.7% for Q2.
Crestwood’s portfolio positions have been adjusted to reflect our current views of the market. The bond market is pricing risk aggressively. We have reduced our exposure to less-safe credit, focusing on quality bonds. We are concerned about low bond yields and have diversified into AQR Market Neutral fund, which continues to add value over bond returns. In equities, we have followed our process of selling or reducing exposure to high valuation companies and adding quality companies at attractive valuations.
In conclusion, despite all the concerns hanging over stocks, we remain focused on the underlying strength of the economy. We will remain invested and improve the portfolio as opportunities arise.
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