Fri, APR 28th, 2017
Aggregate data in the first quarter remained broadly supportive of
both economic expansion and further stock market gains. The labor
market continues to firm up, American balance sheets are healthy,
inflation and interest rates are low, and monetary and fiscal policy
may finally be on similar tracks. Perhaps the biggest change we’ve
seen in the first quarter has been an increase in overall confidence.
Currently, the broadest measures of economy-wide confidence are
in the 90th percentile, per Conference Board data. That is,
confidence among investors, businesses, and consumers has only
been higher than it is today 10% of the time over the past 30 years!
While surveys of confidence represents “soft” economic data,
meaning it may or may not amount to much down the road, the
rapid uptick in mood is worth paying attention to.
All year market participants have had an intense and daily
preoccupation on U.S. politics. However a more important event for
this economic and financial market cycle – one that is often lost – is
that accommodative economic policies and a pickup in real growth
are finally happening around the world. Central bank balance sheets
have expanded, money supplies have increased, investment and
spending is re-emerging, and yields have dropped simultaneously in
many corners of the globe. No longer do we have U.S. economic
stimulus conflicting with Eurozone fiscal austerity, Japanese policy
dispassion or China’s earlier quest to restrain their recovery. This
more synchronized global economic bounce is encouraging.
Perhaps most important has been a recent refresh and restart of the
corporate earnings cycle. After declining for five quarters, annual
S&P 500 profits returned to growth in the third quarter of 2016.
Profit growth accelerated in the fourth quarter 2016, and is
expected to expand further still through 2017. Over the longer-run
we contend that nothing has more direct correlation to stock prices
than business earnings, so profit growth is universally applauded.
Much has been made by various market handicappers of “expensive
/ rich / bubbly” (choose your adjective) valuations for the stock
market, particularly after the post-election rally. However, we
continue to assert that valuations are reasonable when viewed
through the lens of very low interest rates, modest inflation, and
renewed earnings growth.
Monetary policy remains accommodative even with the most recent
rate hike of another 0.25% in March. Once again markets took the
move in stride as the collective narrative was that Fed raised rates
for the “right reason” – that is, the general economy is improving
and wages are rising. If the current economic expansion continues,
our position remains that the Fed is probably on the path towards
further policy normalization (i.e. higher interest rates). Yet with a
low fed funds rate of approximately 0.8% the Fed has room to raise
without significant downside risk to the economy and markets.
Jason L. Ware, MBA / Chief Investment Officer
Albion Financial Group