Cornerstone’s Week on Wall Street

Stocks finished higher last week, a week after recording their biggest advance since last June. It was a fairly uneventful week for notable catalysts, but recent headlines surrounding corona-virus tilted positively. The NASDAQ led the way, up 2.2% for the week, followed by Small-caps, up 1.9%. The S&P 500 index gained 1.7% for the week, and markets in the U.S. out-gained International, up 0.3% and Emerging Markets up 1.2%. Defensive sectors fared best, led by Real Estate (+4.9%), Communications (+3.3%) and Utilities (+2.6%), while Financials (+0.8%), Materials (+0.8%) and Consumer Staples (+0.8%) lagged. All S&P 500 sectors were positive for the week. Treasuries were mixed with the curve flattening and the U.S. dollar index climbed 0.4%. Broader commodities were up 0.9%, as WTI crude oil bounced 3.4% off its lows and gold gained another 0.8%.

As of this writing, 402 of 500 S&P 500 companies (80%) have reported financial results for Q4 2019. So far sales have grown 3.5% year over year, in line with estimates, while earnings-per-share (EPS) grew 1.4% compared to estimates of 2.3%. Retail stocks have yet to report, and if Wal-Mart (WMT) is any indication of what to expect from the sector at large, results may deteriorate further. The retail giant missed on both the top and bottom line, and lowered guidance for the full year. Notably, the company’s guidance excluded the potential impact from the corona-virus outbreak in China, even as Apple (AAPL) on Monday warned that it would miss upcoming guidance for the quarter on fallout from the virus.

Earnings season results to date largely fit in with our view for 2020 that growth may likely continue to slow, as the economy continues to move further along late-cycle. For full-year 2020, Wall Street expects S&P 500 earnings to grow 8%, down from an 11% estimate in December, with the bulk of that growth coming in Q3 and Q4. Guidance is following a very similar playbook to 2019, where earnings came in flat, and we anticipate that 2020 could play out in a similar manner. The main difference between the beginning of 2019, and where we sit now, is that valuation for the S&P 500 is now 28% higher on a forward P/E basis (19.0X today vs 14.8 on Jan 4, 2019). As you can see in the chart below we’re now at the highest forward P/E multiple of the past 10 years.

Source: Factset

Compared to the market’s own history, we are nearing 2 standard deviations above the 10-year average and are also above January 2018 levels where the market peaked and corrected 12%. Valuation is not a timing tool, and just because the market is overvalued, it does not mean that the bull market run is over! But it does mean that some caution is warranted, especially now that we’re seeing some tangible financial effects from corona-virus. We will continue to stick to our process and market signals as we navigate the current environment. For us, it beats the alternative of chasing headlines and talking heads on your favorite financial media channel!

Keep your head on a swivel!

Disclosures:

Listed market indices are provided for information purposes only and are not intended in any way to be representative of Cornerstone Wealth Group’s client accounts or performance.  The holdings and performance of Cornerstone Wealth Group’s client accounts may differ substantially from the listed indices.  Market indices are unmanage and are not available for direct investment.

This material provided by Cornerstone Wealth Group is for informational purposes only. It is not intended to serve as personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment. Any securities mentioned herein are not to be taken as advice or recommendation to buy or sell a specific security.  The information provided may not be applicable to your account managed by Cornerstone Wealth Group. Please contact Cornerstone Wealth Group for specific information regarding the holdings and trading activity of your account. Opinions expressed in this commentary do not represent a personalized recommendation of a particular investment strategy to you. Additionally, you should review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data provided is believed to be accurate, but its accuracy, completeness or reliability cannot be guaranteed.

About FactSet: FactSet is a leading provider of financial information and analytic applications to investment professionals around the globe. To learn more about FactSet’s Solutions for Research contact sales@factset.com or visit www.factset.com. Copyright © 2018 FactSet Research Systems Inc. All rights reserved. #ID226/0118/FSM138

Investment advisory services offered through Cornerstone Wealth Group, LLC dba Cornerstone Wealth, an SEC registered investment adviser. Custody and other brokerage services provided to clients of Cornerstone Wealth Group, LLC dba Cornerstone Wealth are offered by Fidelity Brokerage Services LLC, Member NYSE/SIPC and Charles Schwab & Co., Inc., Member FINRA/SIPC.

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