Hilltop Market Update, August 2018 Video Transcript

Dave:    Hello, and welcome to Hilltop Wealth Advisors’ 3rd Quarterly Investment Review and Outlook.  I’m David Wise, and with me today is Chris Hostetler.

Chris:    Hi, Dave.

Dave:    Thanks for joining me, Chris. To start off, Chris, could you highlight a few of the items really driving the markets year-to-date?

Chris:    Certainly.  You know, we have to acknowledge the trade war talk and all of that tension that permeates the national consciousness. It is a threat to the economy, it’s a threat to the markets, and that’s something we’re not going to lose sight of.  That being said, there are a lot of other things that we think we need to pay attention to.  Most importantly, the US economy is in a pretty strong place right now. We see continued growth and we see still a very low probability of recession this year, as we’ve been saying for the last couple of quarters.  Meanwhile, the Fed continues to raise interest rates, which we’ll talk about a little bit on the fixed income side. And so far in 2018, performance has been slightly positive for US stocks, slightly negative for bonds and international stocks.  Dave, maybe you can share a little more detail about those stories.

Dave:    Yes, in the conclusion of our last quarterly update, we really felt that volatility was going to set in, and that’s exactly what we’ve seen here year to date.  Because of trade war tensions, not just China, but Canada and Mexico, how that’s going to play out; rising interest rates and a stronger dollar which is really impacted those international companies. So all in all, those items have really held the market captive from a global standpoint. If we put that to the side and we focus on the fundamentals, we really feel like there is some strong global growth at this point in time.  In the US, looking more centrally located, we saw GDP growth at 4.1% for the second quarter, which is outstanding, and earnings growth has really been strong here year-to-date.  We’re about halfway through earnings season and those S&P 500 corporations, they have beat expectations about 80% of the time.  That’s a very positive light that suggests that we could see some upward momentum. And really, the combination of strong earnings and subdued market has allowed those valuations to come back within historic norms. If we can have some of this trade talk die down, that potential energy, that bottleneck, if it’s unleashed, could force the market upward through the remainder of the year and into 2019.

Chris:    You know, that would be great, and we think that we’re seeing a similar story affecting the fixed income environment but in a different way.  You know, inflation picking up and the economy being strong, causes the Federal Reserve to worry a little bit about the market overheating and about the economy overheating. To counteract that, they raise interest rates, and we think that we’re probably going to see one or two more rate increases this year. We’ll probably continue at the same pace of rate increases next year as well. Meanwhile, in the other central banks in the other major developed markets, the European Central Bank and the Bank of Japan, they are also working in the direction of tempering economic growth. We also need to acknowledge that bond returns have been mildly negative this year, as I mentioned earlier. To put it simplistically, that is because bond investors think they can get better returns elsewhere, and they probably think that they are going to get slightly better income from those bond investments that are issued in the next year or so compared to what they hold now. All of that being said, we need bonds in our portfolio because they do tend to provide stability during a downturn. And we don’t want to take that stability for granted. Dave, to pivot a little bit, we’ve had some interest in the last couple of years in the health sector. Would you like to talk about that?

Dave:    Yeah, Absolutely! We feel like the story is really about aging demographics, not just here in the US, but globally people need access to healthcare and that’s only going to continue to grow.  Then, outside of that, healthcare stocks tend to outperform in the later stages of the financial/economic cycle. We think we are getting there, so we feel like that’s a good place to be.  In addition to that, on the other end of the spectrum, as we go into a recession, those healthcare stocks tend to provide some downside protection because, as we know, everybody needs access to health care even when the economic conditions are dire.

Chris:    Yeah, and really that’s a global story these days too, as other major economies advance.  So, one last bit of perspective on balance sheets – both corporate balance sheets and individual balance sheets: net worth seems to be pretty high. Corporations are holding a lot of cash reserves and paying a low debt service ratio as are individuals, and those are both strong indicators even if we think we are getting into the later stages of this economic cycle. In a pre-recessionary period, you want to have a lot of cash on hand, and it looks like both companies and individuals are doing that.

So, we’ll close today and we thank you for listening, thank you for watching. We hope you enjoy the last little bit of your summer.

Dave:    Thank you and goodbye.


The information and material contained in this presentation is of a general nature and is intended for educational purposes only. It is solely the opinion of Hilltop Wealth Advisors as of the date of publication and subject to change without notice.  This presentation does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities or products.  Furthermore, this presentation does not endorse or recommend any tax, legal, or investment-related strategy.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor.  All information contained in this presentation has been derived from sources deemed to be reliable but cannot be guaranteed.