Weekly Investment & Economic Talking Points

  1. Equity markets continue to rally into this New Year with nearly all equity indicies being positive (all numbers are YTD): S&P 500 4.28%; Dow Jones 30: 4.44%; Russell 2000: 3.70%; MSCI EAFE: 3.68%; MSCO EM: 4.32%; NASDAQ: 5.21%.
  2. If early meetings are any indication, the most common question we’ll be answering this quarter is, “great, but when is the correction coming”. I actually view this as a positive thing. If we had clients who had historically been conservative all of a sudden wanting to get “into the market” I would be more concerned as performance chasing, while common, is even more so late in a cycle due to a fear of missing out on returns.
  3. Even more good news in terms of this recent run, valuations, while elevated, are not yet expensive and no where near “bubble like” in my opinion. According to JP Morgan, as of 12/31/2017 the Forward P/E ratio on the S&P 500 stood at 18.2x, versus a 16.0x 25 year average.
  4. Inflation was all the rage in the news last week, and we are starting to sound a little like Chicken Little here, but there are continuing signs that prices are starting to rise. Last week CPI was up 2.1% y/y and retail sales crushed expectations, up 0.4% m/m. Combine this with very low unemployment and all of the historical predictors for inflation are in place.
  5. JP Morgan also estimates that by the end of 2018, the unemployment rate in the US may be as low as 3.6%, a rate not seen since the early 1950’s. If we get down to that number one of two things may happen: A) Inflation as employers increase wages to attract workers resulting in increased consumer spending or B) We run out of workers and growth stalls, eventually leading to recession.

Bottom line

We cannot predict corrections. While there is usually a catalyst of some kind, sometimes that is only known in hindsight. Corrections during bull markets are common, because we know that the average intra-year decline on the S&P 500 is 14.1% since 1980 (according to JP Morgan). This is why we have allocations and are not 100% in stocks 100% of the time. Recessions have fairly good historical “tells” – corrections do not.

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