Quarterly Commentary – October 2017

Another quarter and more gains for the financial markets. During this past quarter the US stock market, as measured by the Standard & Poors 500 Index, gained 4.48% bringing the Year to Date total return of that Index to 14.24%. Global markets are also participating with the MSCI EFA (large company stocks in established foreign markets) up 6.16 % for the quarter and 21.13% so far this year. Emerging Markets (think China, India, Brazil, Mexico, etc.) performed even better gaining 7.69% during the quarter and now 27.19% year to date. Given all of the political turmoil and human tragedies of monumental proportions these gains are truly astonishing.

So what is one to think? Can this go on forever? What is the catalyst for these significant gains? In short, no this cannot go on forever, but there truly are conditions that are moving the stock market forward and while there will certainly be market ups and downs (recall the commentary last quarter on a correction coming) overall the stock markets gain over time because world economies gain over time. However, digging a bit deeper in to the weeds what is driving the current stock market? Many will give you there opinion but here is our take at possible reasons.

  1. Continued low borrowing costs – This is a key element in that continued low interest rates mean that companies and governments can continue to fuel their somewhat insatiable need for cash by simply borrowing more and more at these low rates.
  2. Favorable Yield of stock dividends versus interest rates – Currently (October 4, 2017) interest payable on a 10 year US Government Treasury Bond is 2.323%. The arrangement is this. You give the US government $100,000 and they will pay you $2,323 in interest every year for the next 10 years and then give you back your money. Contrast that with this example. Take the same $100,000 and purchase Microsoft stock. As of today (October 4, 2017) the closing price for Microsoft stock was $74.69 per share. But what you also get with that stock is sharing in the $1.68 per share dividend that is paid $0.42 per quarter. So by holding Microsoft you get a current yield of 2.24%. Very close to what you get for owning a 10 Year US Treasury. But here is the big difference, while the dividend from Microsoft is NOT guaranteed the reality is that given its history of raising dividends you have a decent opportunity of that occurring in the future. To give some perspective the dividend for Microsoft began at $0.08 per quarter in 2003 and is now $0.42 per quarter. Of course that does not even take in to account the gain in stock price since that time.
  3. Global Growth – In short there are over 2 billion people in China and India and that part of the World is going through what we refer to as Industrial Revolution 2.0. This phenomenon occurred in Western Europe and the United States over 100 years ago and is fundamentally a movement of people from rural to urban living. When this happens cities grow in population, technology of the time is more utilized and a middle class is formed and this group buys homes, automobiles, electronics, educates their kids and travels. How does that help us in the United States? Boeing sells more airplanes, Starbucks opens more locations and Microsoft has more consumers of its products. Economic activity, most anywhere in the World, impacts that local economy but has the capacity to reach much further and right in to our own back yard.

 

Past performance does not indicate future results. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties.  Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Kestra Advisory Services, LLC. as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The S&P 500 is comprised of 500 stocks representing major U.S. industrial sectors and is considered representative of the market as a whole. Performance figures are inclusive of dividends reinvested. Investors cannot invest directly in an index. Standard & Poor’s Index data can be found at http://www.standardandpoors.com/home/en/us.  MSCI EFA is an unmanaged Index of foreign larger companies with headquarters outside of the United States.