Regions Wealth Management


Bull Set to Charge Ahead?

December 2017

Maybe it’s an early dose of Christmas cheer, but as December moves ahead, we can’t help but be optimistic on global equity markets for the remainder of 2017 and into 2018. Many of our mid-November concerns have been alleviated as small-cap domestic equities (Russell 2000) and the Dow Jones Transportation Average have rebounded, outperforming the S&P 500 from November 17 through month-end. The high-yield index, after a nasty little sell-off in late October/early November, has rallied back and again carries a yield around levels seen in late August. Both the relative outperformance of small-caps/transports and the rebound in high-yield bond indices are positive indicators of healthy investor risk appetite, as “buy any dip” seems to rule the day.

Domestic equities continue to have a strong fundamental tailwind as earnings and revenue growth have been impressive. Current projections have 2017 S&P 500 EPS growing 10.1% above 2016 and 2018 EPS growing 10.8% over the current 2017 estimate – without considering the potential earnings boost from tax reform. The U.S. dollar index (DXY) has weakened substantially this year, dropping 9% through November, boosting earnings expectations for U.S.-based corporations exporting into improving international economies. The S&P 500 garnered 30% of its last twelve months of revenue from outside the U.S., and a weak/weakening U.S. dollar appears poised to boost that number higher still. Wage growth and commodity price inflation are well worth monitoring. Companies being forced to pay higher wages to attract and keep qualified employees in a tightening labor market could ultimately see their margins crimped, although this doesn’t appear to be of immediate concern as average hourly earnings were up 2.6% year-to-date through November, short of 3.0%-3.5% growth that would normally be associated with full employment. Commodity price inflation has picked up due to an uptick in energy prices - the price of a barrel of West Texas Intermediate (WTI) crude oil has gone from $46 at the end of August to $57.40 at the end of November – as well as prices of industrial metals such as copper. Pricing power will be of immense importance for manufacturers as an inability to pass along price increases on throughputs to end consumers could be a canary in the coal mine for forward earnings expectations.

The S&P 500 appears stretched relative to historical norms trading at 19.7 times projected full-year 2017 EPS of $131.69, versus a 10-year average trailing 12-months P/E of 17.3. That said, earnings have surprised to the upside over the past couple of quarters, and forward earnings expectations for 2018 have been ratcheted higher for two consecutive months. Potential positive catalysts remain for global equities and the fundamental underpinnings of the rally remain solid. Valuation has been the primary source of anxiety for domestic equity investors, but valuations can stay elevated for protracted periods of time, leading investors to miss out on returns while waiting for shallow pullbacks to get more invested. The strong upward trend for domestic equities remains, and we have no desire to fight it.

While we remain positive on domestic equities, we are increasing allocations to both international-developed and emerging markets. Valuations internationally are attractive relative to those of domestic equities, and, broadly speaking, international economies are roughly where the U.S. was 3-4 years ago from both a monetary policy and fundamental backdrop perspective. This situation should leave ample economic runway before inflation potentially forces central bankers to aggressively raise interest rates to combat it. We are cognizant of the performance of both the MSCI EAFE (international-developed markets) and MSCI EM (emerging market) indices, up 23.7% and 32.9% on a total return basis year-to-date, respectively; however, since November 30, 2007, both indices have actually posted a negative price return. It has truly been a lost decade for international stocks, broadly speaking. The S&P 500 and Russell 2000 are up 78% and 101% in price, respectively, over the same time frame. We believe international equity markets are “due” for some catch-up relative to domestic equities and are positioning accordingly.

Source: Bloomberg, FactSet

© Regions Bank, Member FDIC. This publication has been prepared by the staff Regions Asset Management for distribution to, among others, Regions Wealth Management clients. Regions Asset Management is a business group within Regions Bank that provides investment management services to customers of Regions Bank. The information and material contained herein is provided solely for general information purposes. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Certain sections of this publication contain forward-looking statements that are based on the reasonable expectations, estimates, projections and assumptions of the authors, but forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed by Regions Bank, its parent company, its subsidiaries or its affiliates for any loss that may directly or indirectly result from use of information, commentary or opinions in this publication by you or any other person. The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Regions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

Neither Regions Bank nor Regions Asset Management (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.