L.I.F.E Newsletter February 2020


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The Background:

The value (based on their stock price vs. their earnings) of companies in aggregate in developed international markets (Europe, Canada, Japan, etc) have lagged the largest companies in the USA (the S&P 500) since 2010, and likewise emerging market companies (China, India, Brazil, etc.) in aggregate have lagged since 2012. This is in large part due to the differences in how much economic stimulus was created by global central banks in the USA vs. abroad coming out of the “Great Recession” of 2008 & 2009. The result is approximately a 20% discounted valuation of companies abroad vs. here domestically.

The Action:

In September and December of last year, we took proceeds from ETFs (index funds) owned in both developed and emerging markets and invested them in developed international and emerging markets mutual funds. I believe this decision will allow clients to benefit from the appreciation of select “best of breed” companies within each asset class, as well as provide enhanced downside risk management from sections of the equity market that are more susceptible to unforeseen risks i.e. coronavirus. International equities now account for 35% of the total equity allocation in our customer’s retirement accounts (½ developed international and ½ emerging markets). For example, if your portfolio is 60% stock and 40% bonds, 21% of your total portfolio would be split between equities in companies in developed international markets and emerging markets.

Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. Forward price to earnings ratio is a bottom-up calculation based on the most recent index price, divided by consensus estimates for earnings in the next 12 month (NTM), and is provided by FactSet Market Aggregates, price, as provided by FactSet Market Aggregates. Past performance is not a reliable indicator of current and future results. Securities are offered through LPL, member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a Registered Investment Advisor. WCG Wealth Advisors and Abound Financial, LLC are separate entities from LPL Financial.


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With Q4 2019 earnings season coming to a close, companies have done an admirable job growing profits. Despite slowing global economic growth, weakness in capital investment and manufacturing, and a strong U.S. dollar, S&P 500 companies delivered better than expected earnings growth of 1–2 percentage points on average during Q4 2019. That earnings gain may cement Q3 2019 as the trough, which should end recession fears in the near term. 65% of S&P 500 companies have beaten revenue estimates, the highest number since Q2 2018 and well above the long-term average of 57%.

What is unknown is the impact coronavirus will have on companies’ earnings in Q1 2020. While things could get worse before they get better, I see its impact being short term.

Source: LPL Research weekly market commentary February 24, 2020

Securities are offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through Abound Financial, a Registered Investment Advisor. LPL Financial and Abound Financial operate as separate and unaffiliated entities.

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