The wild swing experienced at the end of the quarter due to the Brexit announcement was a true test of nerves for individual investors as well as investment professionals. The volatility confirms our belief that when you mix “Wall Street geniuses” and the media it produces an infinite level of stupidity. Stepping back from the barrage of headline seeking calls being made by a number of well-known gurus, we do believe there is a possible negative impact on GDP within the EU, however not to the extent commonly mentioned from some well known financial institutions.
The start of the third quarter has been extremely bullish and we do expect 2nd quarter earnings to mostly meet or beat expectations. In the past we have been sensitive to earnings beats relative to lowered earnings estimates which is why we monitor estimated earnings adjustment trends. These trends have actually improved during the year where estimates are now holding at existing levels or adjusted upwards compared to recent patterns of overwhelming negative adjustments. Even though fundamental factors may look good, positive reported earnings may not support a continuing rally from these near-record levels.
Our recent in-depth analysis of the DJIA has provided a fundamental basis for us to raise our support level from 16,000 to 16,400 for the current fiscal year and based on projected earnings growth for the following fiscal year our target for the DJIA is 17,550. Even though markets are overbought at this time relative to current fiscal year valuations, it is good to see that fundamentals may catch up over time providing a better outlook to downside risk. In looking at the S&P 500, we see that it will probably not be one of the top performing benchmarks in 2016. This should reverse the effects of diversification, where in recent years if you included other asset classes for the purpose of diversification, your portfolio would lag behind the S&P 500 due to its outperformance relative to other asset classes.
The utilities sector and large cap dividend yielding stocks have both performed extremely well this year in the low interest rate environment. Interest rates continue to be driven by weak global economic factors and risks, which now includes the recent Brexit announcement. Even though GDP growth remains a positive in the U.S., the Federal Reserve must consider how events overseas may have an impact on our economy and the course of our interest rates. These are some of the risks we must consider in our continued vigilance of capital market expectations and how it impacts your personal financial goals.
As always, feel free to reach out to your consultant should you have any questions or concerns.
We are excited to announce the addition of Anthony Civitello and Rosy Sparacio to the Ellis team. Anthony, who was an intern with us during college, will be joining our Portfolio Management Operations and Rosy will be joining our Administrative Staff. They will play vital roles in the growth of our organization and in the fulfillment of our commitment to our clients. Please note that our fall events are coming up fast. Contact Leslie Tritschler @ 484-320-6300 for more information so you can plan accordingly.