The third quarter earnings season is wrapping up, with 451 companies of the S&P 500 Index reporting so far and sixteen expected to report this week. Approximately 80% of reported company earnings have exceeding analysts’ expectations, which is in-line with the average of the preceding four quarters yet considerably above the long-term average of 64%. Sixty percent of companies reporting thus far are exceeding revenue expectations and while this figure is in-line with the long-term average, it is below the average of 73% over the last four quarters.
As of today, all companies in the financial, real estate and utilities sectors have reported. The sector with the largest surprise is consumer discretionary with energy closely riding its heels. Information technology has the most companies reporting earnings above expectations, followed by the utilities and health care sectors. The energy and materials sectors have the most companies that have reported earnings below expectations.
With regard to fourth quarter guidance, earnings are still growing but the majority of companies are projecting EPS to be lower than forecast. Factoring in earnings expectations, the one-year forward P/E ratio for the S&P 500 Index is 16.3. Moreover, if earnings are in line with forecast, the market will need to move higher to maintain its current P/E of 18.8.
Volatility, the New Normal?
Whether you’re watching the bond market or domestic US equities, 2018 has presented more volatility than we have seen in recent years. This can cause investors to question strategy and be tempted to “play” the volatility or move to the sidelines.
The yield on the 10-year US Treasury rose 45 basis points in 2018 to a short-term high in February before pulling back to the 2.80% mark. Moreover, in the last thirty days we have witnessed numerous three percent or greater shifts in this part of the yield curve both upward and down. As one would expect, the equity market has not been dissimilar, experiencing even larger percentage swings. After a correction of greater than 10% in early February, domestic equities spent the next five days recovering or essentially bouncing off this short-term low. Over the last month more than half of the trading days have seen a change in closing price on the S&P 500 Index in excess of 1%, either up or down. If we were to look at the change in intraday high/low, that percentage of trading days would be considerably higher.
Suffice it to say we have been experiencing some volatility. What does that mean and what should you do about it? For insurers, we recommend keeping the long-term perspective. If you’re already investing in equities, it could be prudent to take advantage of larger market corrections by “averaging into” your holdings. This will help lead to outperformance over time. If you’re considering investing in equity for the first time or the first time in a while, keep in mind the surplus volatility marked to market assets such as common stocks present. Again, long-term perspective is key. We recommend determining how much surplus volatility due to equity each insurer is willing to tolerate then backing into an appropriate equity allocation based upon large valuation swings, such as 25% or 50%.
Keep in mind that trying to time the market doesn’t work for the vast majority of investors, including professionals. Timing the market insinuates calling the bottom and top of the market and trading accordingly, while being able to outperform the general market performance. Based upon historical, publically available data, if an investor were to miss out on the best five days in the S&P 500 Index over the past 35 years, said investor would experience a total return less than half of what an investor would experience if remaining invested throughout all trading days. This is not to say that buying on the dips will not be beneficial nor is selling when your equity allocation appreciates to your maximum an imprudent decision. The goal should be to determine long-term allocation and percentage exposure, including a target allocation. When the market experiences natural corrections consider averaging in. When market appreciation causes your allocation to grow beyond the upper constraints of your long-term allocation, consider reducing exposure.
We welcome your feedback and would be delighted to speak with you about any specific questions or concerns regarding your investment portfolio. Have an opinion on the recent market volatility? We would enjoy hearing your thoughts on that as well.
Parkway will be attending the Life Insurers Council Annuity Committee Meeting on Tuesday, March 6, 2018 – Thursday, March 8, 2018 in Beaver (Pittsburgh), PA. We are honored to be the Premier Sponsor and look forward to presenting on investment strategies while we are there.
Parkway Advisors is honored to be a Premier Sponsor for the Life Insurers Council in 2018. We are looking forward to the upcoming annual conference in Arizona in February and hope to see everyone at this amazing learning and networking event.
One of the local organizations that we support in part of our “Helpers of People” initiative is Pregnancy Resources of Abilene.
Pregnancy Resources of Abilene is a nonprofit Christian organization dedicated to promoting and defending the sanctity and integrity of all human life. Some of their services include –
– Pregnancy Testing
-Pregnancy Verification through Ultrasound Exams
-Medical Consulation and Referrals
-Pre-Natal Consulation & Education
-Material Support (diapers & formula)
-Community Resource Referrals
-Pregnancy and Parenting Classes
All of their services are free and confidential.
In March our company sponsored one of their fundraising events called Life in Bloom. “Bloom” is their annual fundraising banquet that is held every spring. They have been honored to have wonderful keynote speakers: Max Lucado, J.C. Watts, Star Parker, Steve Arterburn, Joe White, Rebecca St. James, Michael W. Smith, Pam Tebow, Bob Goff, and Brad Stein. In 2018 they will be bringing in Christian recording artist Matthew West.
Bloom is an opportunity to look inside Pregnancy Resources of Abilene, learn how they serve our community and catch the vision for the years to come. We are honored to be able to sponsor such a great organization. To learn more about Pregnancy Resources of Abilene click the link to their website https://www.prabilene.com/
During the months of April and May, Parkway attended many conferences. Two of the main ones were the AFA 2017 Executive Summit in April and the AFA 2017 Spring Symposium in May. The AFA, or American Fraternal Alliance, unites nearly 63 not-for-profit fraternal benefit societies operating in 50 states, the District of Columbia and Canada. Alliance member societies represent nearly 8 million individuals, making it one of America’s largest member-volunteer networks. Through advocacy, developing policy and providing opportunities for a broader understanding of fraternal benefit societies as financial providers and community service activists, the Alliance serves as a vital and valued resource.
We have developed great relationships with members of the AFA and look forward to continued success through those events. In our next post we will share a little more about some of the Board Education Master Classes that we speak at helping to provide valuable information to Board Members of the Fraternal Industry. To learn more about the American Fraternal Alliance click the link to their website https://fraternalalliance.org/