Quarterly Commentary


Market Update


October 16, 2018

The Third Quarter of this year was a very good one for the broad stock market, despite all the worries about a potential trade war and rising interest rates. As we stated last quarter, we felt that those trade war fears were already reflected in the stock prices.

There actually has been some good news on trade. Not yet passed into law, the “USMCA”, the US, Mexico, Canada trade agreement, replaces NAFTA and generally benefits the US auto, energy and agricultural markets. 

Not all stocks and sectors performed well during the quarter. There was quite a bit of divergence. US stocks widened their lead over global stock markets. European stocks have significantly lagged and Chinese stocks have been broad losers. US small-cap stocks took a strong lead this year, after lagging in the prior year. Our small-cap exposure through the IJR index was a top ten performer in our core stock list during the third quarter. 

This continues to be a “growth” driven market, with value stocks still lagging. Our value names like Bed Bath and Beyond, Ford, and Whirlpool were in our bottom ten core performers, but our growth stocks in the technology sector did very well, which included Microsoft, Adobe, and Salesforce. Click here to view top 10 best and worst performing stocks for the third quarter 2018. 

Healthcare was another growth sector that performed nicely. Our core healthcare stocks, Edwards Life Sciences, Amgen, and Merck were among our top ten stocks for the quarter. 

As a broad sector, homebuilding related stocks did very poorly. Rising interest rates and now, low affordability for buyers due to those higher interest rates, land prices, lower supply, and higher taxes are the culprit there. This contributed to Floor and Decor’s, one of our core stocks, poor performance. A small-cap, home improvement retailer, their fast growth in number of stores and markets around the US has been impressive. Their smaller, more manageable square footage for shoppers and popularity with contractors spurred their prior growth in number of stores.

Financial stocks also lagged, particularly those related to mortgage lending. Our large core bank stocks are broadly diversified and should benefit from higher interest rates and less government regulation. 

At this juncture, Chinese stocks appear to be very undervalued on valuation or trailing price to earnings multiple versus US stocks. They have been broadly pressured by trade war concerns, pressure on their currency, and fears of Chinese government regulation on gaming and technology companies. Click here to view chart.    

By far the biggest shift for the S&P 500 Index and the MSCI index has been their component stocks shifting to different sectors. This is very significant and came at the end of the third quarter.  Christian Ledoux covers this in more detail in our quarterly webcast.    

At this juncture, mid-term elections take an important, high visibility, which could pause the stock markets until the election outcome is known.  

I encourage you to watch our Third Quarter 2018 Webcast. Click here to view the webcast. 

Also, click here to view our quarterly non-profit spotlight featuring our client, Texas A&M University-Kingsville Foundation. 

Sincerely,  

Jeanie Wyatt, CFA
Chief Executive Officer & Chief Investment Officer

 


Disclosures

This letter is not intended to constitute investment advice. Market and economic views are subject to change without notice and may be untimely when presented here. You are advised not to infer or assume that any securities, sectors, or markets described in this letter were or will be profitable. Securities identified in this letter do not represent all of the securities purchased, sold, or recommended for advisory clients, and you should not assume that the recommendations made in the future will be profitable or will equal the performance of the securities identified above. A complete list of all equity recommendations made by STMM during the past year is available upon request. Past performance is not indicative of future results. There is a risk of loss.

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