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MESSAGE FROM THE PRESIDENT TOM L. STRINGFELLOW, CFA®, CFP®, CPA, CIC

President

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:

Mean Reversions, perhaps…

It was a difficult week for the equity markets, with the major indexes here at home drifting downwards by at least 2 percent. There were also a number of negative headlines that exacerbated the sell-off, including a highly disappointing jobs report, a widening trade gap and potential slowing in earnings growth. In terms of the labor markets, February’s nonfarm payrolls rose by only 20,000 newly filled openings (expectations were closer to 180,000 new jobs). The takeaway from the report was that the recent government furlough, weather conditions and perhaps current outstanding trade issues helped dampen last month’s job growth. The report implies that the first quarter GDP estimates will be trimmed a bit.

Considering corporate earnings expectations, there are arguments that the impact from the tax cut are beginning to wear thin. Following up on a Leuthold Group report, earnings last year were a function of lower tax rates and improving sales growth but still relatively flat margins. The group’s data for 2018 overall highlighted that sales growth was a positive 7.8 percent, with earnings growth pushing up by 20.9 percent helped by an estimated 8 percent contribution from lower tax rates.

With the anniversary “benefit” of the initial effect of the tax cuts rolling off, estimates are dropping. According to the latest analysis from industry pundits, the initial estimates for first quarter earnings for the S&P 500 is a drop of -3.4 percent, with the source sales having a significant sway on specific company earnings. The most recent data from Factset has noted that the more “foreign” the sales channels, the steeper the drop. For companies with more than 50 percent of their revenue generated overseas, earnings estimates are a negative 11.2 percent. More U.S. centric companies are expected to deliver a positive 1 percent. Earnings estimates over the past few quarters have been generally lower than actual reports, and hopefully this trend continues.

The news on the economic front has also been mixed, but it is still trending positive. The last fourth quarter’s GDP report was ahead of estimates, moving up to a 2.6 percent growth rate. The outperformance (+0.4 percent over estimates) was, in part, because of higher R&D expenditures during the quarter, along with stronger non-residential fixed investment. Last week’s ISM Non-Manufacturing report hit a three-month high and was also ahead of estimates (+3 percent), as labor productivity improved and business activity hit its highest reading since 2005. One negative was the burgeoning trade deficit, which hit a 10-year high in December (and probably will contribute to drag on Q1 GDP). The annual deficit for 2018 increased overall by $68.8 billion, as the deficit with China continued to expand (up by +/- $43 billion).

M A R K E T N E W S & V I E W S W E E K O F M A R C H 1 1 , 2 0 1 9

M A R K E T C O M M E N T A R Y

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THE PAST WEEK IN CHARTS

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Equity Markets

Ten years ago this past weekend, the equity markets reversed course from the “Great Recession,” and the S&P 500 has now returned a +/- 400 percent return (including dividend reinvestment). The now historic run can be attributed to low interest rates, corporate profit growth (albeit aided by stock buybacks, a very accommodative central bank and, of course, the tax cuts).

Today, the S&P 500 is still lagging from its fourth-quarter selloff, and price multiples, while slightly higher than their 10-year averages, are not overly extended. Inflation fears have been kicked down the road, although perhaps replaced by new, but still unwarranted, recession fears. There are few bubbles to worry about as the job markets, housing, consumer/business sentiment (and spending) are all positive. Fears over trade, Brexit and geopolitics are a concern, but they are not unknown to the markets. And while a slowdown in the global economy and investor expectations may be warranted, these aren’t the ingredients to derail the markets.

Jobs, Wages & Productivity

Partially with the muted increase in U.S. nonfarm payrolls posted in February (+20,000), growth is at its slowest pace now since the 2017 hurricanes and represents the biggest estimate miss in 10 years (estimates were 180,000). The slowdown was broad-based, with the manufacturing sector up by only 4,000 positions and the average hours worked falling slightly from 34.5 to 34.4 hours. Weather was blamed as one of the primary culprits, but we’ve noticed over the past few years that this is a recurring issue, especially during the winter and hurricane seasons.

One possible bit of good news is that the return of those furloughed government workers was not built into the employment numbers, at least reaffirming the +20,000 was a net positive. These net changes did manage to push the unemployment rate back down to 3.8 percent from its prior 4 percent, with average wage growth up a better than expected 3.4 percent.

Regarding labor output, productivity was up 1.8 percent for Q4, with the average increase for the year up 1.3 percent, the highest since 2015. As a frame of reference, productivity for 2007-2018 averaged 1.3 percent while the period during 2000-2007 averaged 2.7 percent. Doing less with more it would appear.

Global Economies

Despite a handful of positive overseas news items, a number of issues of concern to the financial markets still exist. Manufacturing data was relatively positive (ex-Japan/China) although not so much for most of Europe. One stabilizing influence in Europe could be the recently announced decision from the European Central Bank to hold off on any rate increases. The decision follows a more negative outlook for both growth and inflation in the Eurozone.

The news from China last week wasn’t particularly uplifting either. Exports from the country fell 20.7 percent on a yearly comparison for February, much worse than the earlier estimates of -4.8 percent. Keep in mind that this time last year the nation’s exports were a positive 9.1 percent growth. China’s economy is expected to continue slowing, although the “’official” economic growth target for 2019 is ranging from 6 to 6.5 percent and trending towards the slowest growth rate in nearly three decades. One upside is a possible improving potential in both the U.S. and China to agree on a mutually acceptable trade deal.

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MARKET PERFORMANCE

Key Market Indices Last Chg % Chg 1 Week

Chg 1 Week % Chg

1 Mth % Chg

YTD % Chg

12 Mth % Chg

52 Wk High

52 Wk Low

S&P 500 2,743.07 -5.86 -0.21 -60.62 -2.16 1.30 9.42 0.15 2,940.91 2,346.58

Bloomberg Barclays US Agg 101.07 0.05 0.06 0.63 0.68 0.29 1.49 3.69 101.07 97.85

Bloomberg Barclays Glbl Agg x US 110.14 -0.02 0.06 0.58 -0.10 -0.44 0.40 -4.63 110.58 107.62

MSCI AC World Ex US 353.31 -3.55 -0.99 -4.71 -1.17 2.33 8.31 -0.99 380.54 321.86

WHAT WE ARE WATCHING

Key Events: Key data include US retail sales, CPI, hourly and weekly earnings, and capital goods orders. China’s availability of credit – aggregate financing – is keenly watched. President Trump to reveal the 2020 budget.

Geopolitical: Yet another vote by Parliament on Brexit on Thursday: House of Commons either approves May’s revised Brexit deal, or if rejected, it will vote again to leave without a deal (a so-called “hard Brexit”) or to delay leaving the EU beyond the March 29 deadline. China’s National People’s Congress is held in Beijing.

U.S.: Retail sales, CPI, average weekly earnings, PPI wholesale prices, NFIB small business survey, durables, and capital goods orders, IP, job openings (JOLTS), U of M consumer surveys.

EUZ: Eurozone IP, CPI, EU27 car registrations. German IP, trade balance, labor costs, CPI.

JPN: Machine tools, PPI.

China: Money supply, IP, FDI, aggregate credit financing, retail sales, new loans.

Central Banks: BoJ policy and 10-year JGB target.

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INTERESTING FACTS

The increase in the number of “owner” households in the USA in the last two years almost matches the increase in the number of “owner” households in our country in the previous 14 years. From the end of 2002 to the end of 2016, the number of “owner” households increased by +3.8 million to 75.7 million. From the end of 2016 to the end of 2018, the number of “owner” households nationwide increased by +3.7 million to 79.4 million (source: Census Bureau).

The average single-family home in the USA increased in value +5.7 percent during 2018. Home values in Idaho increased +11.9 percent (top state) while home values in North Dakota were flat (bottom state) (source: FHFA).

In 2017, 25.5 percent of Americans had no claims for any health care service (i.e., they did not see a doctor or visit a clinic) or filled a drug prescription (source: Health Care Cost Institute).

U.S. farms suffered their worst credit crisis in 1987 when high interest rates and falling land prices were the backdrop for 5,788 Chapter 12 bankruptcies nationwide. Just 498 farms filed for bankruptcy in 2018. Chapter 12 bankruptcy is available only to family farmers or commercial fishermen and is less expensive and less complex than a Chapter 11 bankruptcy filing (source: Department of Agriculture Farm Service Agency).

The 12.8 million manufacturing jobs in the United States as of February 2019 are the nation’s largest total since December 2008 (source: Department of Labor).

The U.S. trucking industry moves 61 percent of the freight transported within the USA (measured by dollar value) and 65 percent of the freight transported to Canada and Mexico from the U.S. (source: Bureau of Labor Statistics).

President Trump is expected to release an overview of his fiscal year (FY) 2020 budget today, to be followed by budget details on Monday, March 18, 2019. Total FY 2020 government spending is projected to reach $4.69 trillion or just short of $13 billion a day (source: White House).

Iosua Opeta, an offensive lineman from Weber State, had 39 bench-press reps of 225 pounds, the most recorded at the NFL Scouting Combine in Indianapolis that ended March 4, 2019. (source: NFL).

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TOPICAL READS

Bull Runs, Sharing Economies and Outcasts Markets Make Everyone Feel Stupid at Some Point Howard Marks, CFA: Getting the Odds on Your Side Why Do Markets Go Up? Edges That Won’t Go Away How America Learned to Stop Worrying and Love Deficits and Debt What the Historical Data Says About Stock Market Losses Self-made billionaires like Warren Buffett and Elon Musk prove if you don't make time for these 6 little things every

day, you'll never be successful US productivity rose a modest 1.9% in the fourth quarter Boeing's Stock Just Dropped the Most Since 9/11 Following Fatal Crash of Second 737-down/ The only way to stop fake news is to eliminate our demand for it What stores are closing in 2019? See the list

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