November Disciplined Equity Perspectives

November Madison Disciplined Equity Perspectives

Near the end of October, the S&P 500® Index hit a new all-time high, finishing the month with an advance of 2.2% and a year-to-date return of 23.2%. Perhaps you missed the celebration, with so much else in the news. One event that was of special interest to market watchers was the October 30th Federal Reserve (Fed) announcement that its benchmark lending rate was being lowered a quarter of point, the third such cut in 2019. The three interest rate cuts in 2019 have now fully offset the last three interest rate hikes in 2018. In this latest round of cuts, the Fed cited weak business spending and export issues, signaling a general concern over the direction of the economy. At first glance this might appear at odds with a record market. But despite cautionary comments from the Fed, the market appears to be responding to the global monetary stimulus beginning late this summer combined with trade risks subsiding, and an earnings season that has so far been better than feared.

The most recent data on third quarter economic expansion showed an annualized 1.9% rate of growth, which was a bit higher than expected and on solid ground at this point in a decade long economic expansion. The principal driver of GDP growth is the consumer. This is reflected in both consumer spending, up 2.9%, and consumer confidence remaining at elevated levels, helping to balance declines in capital expenditures and weak industrial production. Consumer strength is supported by strong job numbers, a low unemployment rate, and rising wages. In addition, initial jobless claims remain at 50-year lows, another positive indicator for the health of the consumer. Rising wages have primarily benefited the lower income segment of the population. Despite a healthy consumer and employment situation, one of the areas we are paying attention to is rising consumer debt. Consumer lending has increased but non-performing loans are stable according to recent earnings reports from the large national banks. We have seen an increase in longer-term car loans, with seven-year loans now comprising 31% of the market, up from less than 10% in 2009.

With stocks at record highs a slowing global economy, and the added confusion of turmoil of a new sort in Washington, what does this mean for investors? One immediate result will be the trimming of money market returns and the likely decrease in mortgage rates – not so great for conservative cash reserves, but good news for house hunters. But what does it bode for the stock market?

One clue we look for is market breadth. When markets advance as significantly as we’ve seen this year so far, it can be a result of a general rise in securities or a concentrated one, as we saw in the tech bubble at the beginning of this century. In concentrated rallies of the past we’ve historically missed some of the upside due to our aversion to overly priced, speculative stocks, but have had strong relative results when those stocks falter. This is the core of our ‘Participate and Protect’ investment philosophy. So far this year, the market has been led by highly valued large-cap technology stocks. While we do have some exposure to what we consider the best of this bunch, we are underweight the index if you add up these leading stocks. During the month of October, four sectors outperformed the overall market, led by Technology, with a particular boost from the more volatile semiconductor stocks. We also saw outperformance in the Healthcare and Financial sectors, which have lagged market returns year to date. Financials are responding to the stabilization of interest rate and Fed monetary policy. Healthcare stocks remain in the crosshairs of political rhetoric, yet valuations look attractive as any policy risk seems to be discounted. 

The economy has indeed slowed but monetary policy has picked up, pre-empting any impending recession concerns on the horizon. The US market is at record high prices which makes risk management a primary area of focus for us currently. We also continue to look for investment opportunities in industries that have lagged market returns as we head into a Presidential election year that presents more uncertainty. Uncertainty can be disturbing, but high seas can also be the periods in which accomplished sailors can make progress. It is our goal to be these kinds of stewards of your assets as we head into what is likely to be the familiar-looking, but always unknowable markets of tomorrow.

Download Full PDF

  • Any performance data shown represents past performance. Past performance is no guarantee of future results. 

    This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

    While Madison constructs portfolios for various risk tolerances, it does not determine individual client’s risk tolerance or investment objectives.

    Madison’s expectation is that investors will participate in market appreciation during bull markets and be protected during bear markets compared with
    investors in portfolios holding more speculative and volatile securities. There is no assurance that Madison’s expectations will be realized.

    Current performance may be lower or higher than the performance data shown. Holdings may vary depending on account inception date, objective
    and other variables. Any securities identified and described herein do not represent all of the securities purchased or sold, and these securities may
    not be purchased for a new account. There is no guarantee that any securities transactions identified and described herein were, or will prove to be profitable. Any securities identified and described herein are not a recommendation to buy or sell.

    The information provided has been obtained from sources Madison deems to be reliable; however, it makes no representation as to their accuracy or
    completeness. Unless otherwise stated, all statistical references are as of October 31, 2019.

    Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the
    performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

    The S&P 500® is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

    Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.

  • “Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC, and Madison Investment Advisors, LLC, which also includes the Madison Scottsdale office.  Madison Funds are distributed by MFD Distributor, LLC.  Madison is registered as an investment adviser with the U.S. Securities and Exchange Commission.  MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. 

    Madison Investments shares all personnel and resources at their Madison, Wisconsin location. Statistical data is for the consolidated Madison organization. The Madison organization consists of its holding company, Madison Investment Holdings, Inc. and its affiliates: Madison Asset Management, LLC; Madison Investment Advisors, LLC; and Hansberger Growth Investors, LP. Asset information presented includes non-discretionary assets. Refer to each entity’s Disclosure Brochure for more information.

Expand