Hilltop Market Update, February 2018


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Video Transcript:

Chris: Hi there. Welcome to the Hilltop Wealth Advisors’ Market Update and Outlook for the first quarter of 2018. I’m Chris Hostetler and with me today is Rusty Eriksen. Thanks for being with me Rusty.

Rusty: Glad to be here, Chris.

Chris: So, we were just wrapping up our quarterly investment outlook meeting a couple of weeks ago and remarking that we have seen a pretty good run in the markets lately. Fixed income investments were somewhat flat in 2017 but stock markets in both the U.S. and abroad had a pretty good run. It was a good year across the board, wasn’t it?

Rusty: It was and when we were talking with the different economists and investment professionals that we normally talk to as part of our quarterly review, it was amazing to see how many of them used the same phrase- “global synchronous growth.” That’s really what we saw last year. It was a time period where we saw not only economic growth but also appreciation in the value of equities and stocks around the world. Not only U.S. but international; both developed and emerging.

Chris: Yeah and with that synchronous growth, everything moved pretty smoothly, as we mentioned. And the other thing that we were noticing was that there had been relatively little volatility. In fact, remarkably little volatility, to come with that. Soon as we said that, boom, it hits, right in the early part of 2018. Right?

Rusty: That’s correct. Here in the beginning of February, we have seen the market fluctuate and we are now in what’s called a correction; where we see the market come down 10% from its previous high watermark. But that’s not actually that uncommon. That’s something that we generally see about every year. What was really strange was how well the market performed last year and how little volatility there was. We just look at the S&P 500, for example, 500 U.S. large company stocks. That index was up every single month and that’s the first time that’s ever happened where we didn’t have a single down month in that market index. So, a little bit of volatility is certainly normal and it’s something that we don’t necessarily enjoy but it is part of a normal market experience. It’s come back a little bit here in 2018 and I think it’s reasonable to say we’ll probably see some more before the end of the year.

Chris: Yes, so, that trend changed from relatively smooth sailing to more normal market volatility. What does seem to have continued, though, is that international stocks continue to be cheap relative to U.S. stocks. So, we always compare how stocks are priced relative to the earnings of the underlying companies. And, we felt for a while that U.S. stocks were maybe a little on the high-priced side and international stocks were on the cheap side. And though international stocks performed well in 2017, so did U.S. stocks. So, it looks like that difference still exists, that international stocks continue to be cheaper.

Rusty: I think so and that’s kind of our read on things right now. And one area that we are pretty optimistic about is looking at small and medium sized international companies that maybe aren’t on the radar screen of a lot of investors. We see those at some pretty attractive evaluations right now relative to some other areas. But we have seen earnings growth, not only in international markets but also in the U.S. And so, we do think that, here in 2018, we will see more continued economic growth and expansion and it seems like that trend is continuing to head in the right direction.

Chris: So, with those things trending in the right direction and with fundamentals in other areas like: consumer sentiment, corporate sentiment, probably continued, if not easing, at least accommodative, stances from the central banks internationally, in the U.S., and abroad, then we probably will continue to see a low probability of a recession going forward.

Rusty: I think so. One of the areas that areas that different folks have pointed to lately that may be the cause of some of this recent volatility in the market is maybe some concerns about rising inflation. And as you were talking about rising interest rates in the federal reserve, maybe we see the federal reserve raise rates a little bit faster here in 2018 than was previously expected. I think the market has kind of priced in two to three rate increases this year already. If we continue to see wage growth, we might see that the Federal Reserve needs to raise that key interest rate a little bit more just to keep inflation in line with where they’d like to see it. But wage inflation isn’t all around a bad thing, right?

Chris: Right. We should be celebrating wage increases, we are happy that people are getting paid more. So, to summarize for today: we enjoyed quite a good market run in 2017, volatility is normal, earnings continue to be strong and look to continue growing and we believe a low probability of recession.

Rusty: That’s right.

Chris: Thank you for joining us today and we hope you enjoyed watching.

Rusty: Thank so much for watching and please let us know if you have any questions.