With the Tax Cut and Jobs Act (“TCJA”) now a little over a year old, this week’s chart looks at the effect of the tax cut on companies in the S&P 500. Despite a headline corporate tax rate of 35%, S&P companies in aggregate were paying an effective tax of only 25% over the twelve months leading up to the tax cut. Lowering the headline rate from 35% to 21% has clearly had an effect, as the tax rate for the S&P at the end of the third quarter was down to just 18.4% (a reduction of almost 27% year-over-year). This was one of the main drivers of strong growth in profits for U.S. companies, as the S&P 500 earnings growth peaked at 27% year-over-year in the third quarter (blue dotted line in the second chart). However, as we move into 2019 the positive effects on earnings growth from the tax cuts will fade, and corporate earnings growth in 2019 is likely to be significantly slower than what investors experienced in 2018, which could be a headwind for the equity market as the year progresses.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Companies have been staying private longer, but expectations for Initial Public Offerings (IPOs) in 2019 are high. Uber and Lyft filed their intent to list their shares publicly with the SEC in December. Most recently, other private companies have been exploring if it makes sense to go public at current valuations. Peloton, the popular exercise bike company, has been exploring an IPO this year as its valuation has climbed to more than $4 billion, roughly 3 times as much as its $1.25 billion valuation in 2017. The chart above shows the amount of money raised via IPOs in each calendar year. But what risk does the previous government shutdown have for the IPO market?

The most favorable time for an IPO is typically when the stock market is doing well, volatility is low, and political risks are mitigated. Due to the recent partial government shutdown, the SEC is backlogged with paperwork, which has delayed planned IPOs during this current favorable environment. The risk is that if another shutdown occurs, there could be an extended delay featuring stale financial statements and other administrative delays, which would naturally discourage companies from wanting to go public. The companies that are most at risk are those that are running low on cash and need capital to continue operating. Business owners and venture capitalists are also at risk of not being able to cash out as quickly as they would like. Though the shutdown has caused a delay in listing, it should not prevent the blockbuster companies from listing publicly. Companies like Uber – which has been valued as high as $120 billion – are looking to tap the larger pool of capital in the public markets. Even though the government shutdown has already caused delays of around 30 days, the expectation is that 2019 will ultimately provide a record amount of capital raised through IPOs.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

This week’s chart looks at price action of the Value Line Geometric Index. Originally launched in 1961, the Value Line Geometric Index provides exposure to North American equities. It is comprised of over 1,600 companies from the NYSE, Nasdaq, Toronto Stock Exchange, and various over-the-counter markets. The index is equally weighted, and thus can provide insight into the health or breadth of the overall equity market relative to more commonly referenced market cap weighted indices. Market cap weighted indices, by design, are disproportionately driven by their larger market cap weighted components. Thus, an examination of equally weighted indices can shed light on trends often missed when focused solely on the actions of market cap weighted indices.

As seen in the chart above, the Value Line index has historically encountered resistance at the $500 price level. The index traded near this key resistance level in 1998, 2007, and 2015. More recently, the index was able to break out above this resistance level beginning in December 2016. Following the 2016 election, the index saw broad market participation as a result of the current administration’s pro-growth narrative and late cycle fiscal stimulus effects. A host of factors contributed to the recent retracement of the index below this $500 level starting in mid-2018 including concerns over rising interest rates, slowing global growth, trade/tariff effects, and various political uncertainties.

From a technical analysis standpoint, if the index can maintain a sustained breakout above this level then this would be a bullish signal for equities. However, a failure to retest and breach this level could signify further downside risk and warrant a cautious stance within equities.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Like past bull markets, this most recent one since 2009 has had relatively little daily volatility, which we define here as moves greater than two standard deviations from the mean daily return. Specifically, we look at two standard deviations to the downside during a calendar year basis as compared to its historical average over the last few market cycles. This means the S&P 500 would’ve fallen about 2.2% or more in a single day. The last three bull markets are roughly visualized through the valleys in this negative volatility, which is indicative of the smooth ride up investors have had.

Not surprisingly, the majority of total positive and negative two standard deviation moves have been on the negative side at about 60% of the time since 1990, or in days, about seven trading days per year. In 2018, investors experienced significantly more downside volatility than in recent years; however, within the context of bear market years, this move is not so bad. While this is an interesting story from the data, ultimately macroeconomic and geopolitical developments will undoubtedly determine if this bull market has any life left.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

It has been a wild ride since the equity market peaked on September 20th. Almost three months later, the S&P 500 is down 14.0%, marking the second market correction this year. Corrections occur when the market falls more than 10% from its market peak. Investors have been caught off-guard by this year’s volatility given last year’s slow and steady rise. While we predicted that 2018 would most likely be more eventful than 2017’s record-breaking tranquility, we could not predict to what extent. Year to date, we have seen market movements in excess of 1% in one out of every five days this year, and four of the five largest Dow Jones Industrials Average point drops ever despite strong positive economic data within the United States.

Market pauses occur frequently. Since 1920, the S&P 500 has on average experienced a 5% pullback 3 times a year, a 10% correction once a year, and a 20% bear market decline every 3 years.¹ What’s important is that corrections are merely temporary movements and have little impact on returns over the long-term. Since the bottom of the market in 2009, the S&P 500 has returned over 350% cumulatively and 15% annualized. The chart above shows the S&P 500’s cumulative returns after every correction this market cycle.

Markets are constantly under pressure from external events; recent history includes 2010’s Sovereign Debt Crisis, the 2011 U.S. debt downgrade, and fear of slowing Chinese growth in the winter of 2016. Today, market returns are almost flat since February’s market correction. Returns have eventually rebounded after each correction (including the global Financial Crisis) due to the underlying fundamentals of the economy and not elements of fear.

We acknowledge that while global growth did not meet investors’ expectations in 2018, the United States continues to meet or even exceed expectations. Third quarter GDP came in at 3.5%, unemployment is a low 3.7%, personal income is up, corporate earnings are strong, and inflation is a healthy 2.2%. The fundamental backdrop is still positive for the U.S. and is a stark contrast to the market’s performance quarter-to-date. While the recent volatility can be uncomfortable, waiting for market performance to realign with economic fundamentals can be rewarding over the long-term.

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¹ Fidelity Investments, Viewpoints, November 5, 2018

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

U.S. equities experienced a sharp correction last month with broad market indices erasing virtually all their year-to-date returns. The October pullback was especially jarring for investors since it followed an unusually quiet third quarter and had seemingly few changes in the economy or corporate earnings to warrant such a sell-off. Unlike the volatility seen in the first quarter of 2018, the S&P 500 didn’t record a single daily move of more than ±1% in the third quarter. During October, the S&P 500 saw a total of ten daily moves greater than ±1%, surpassing the total number seen in all of calendar year 2017. The recent resurgence of equity volatility coupled with the anticipation of midterm election results has created uncertainty in the outlook for risk assets in the near-term.

While stock prices are ultimately affected by a variety of factors, the fourth quarter has historically yielded the highest percentage of positive market returns compared to other quarters. In addition, market returns following midterm elections tend to be quite strong. Examining S&P 500 returns during midterm election years dating back to 1946, we see that the S&P 500 has never ended the year below its October closing low. The average return over these last 18 midterm elections is +10.6%. Although the sample size for post midterm elections is small, it is reassuring to know that we are in a historically strong period for equity markets.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.