Category: Investments

Author: Tim Courtney

Weekly Commentary: The Economy is Strong. So Why Aren’t Markets Even Stronger than They’ve Been?

Date: 09/28/18

September 2018

Weekly Commentary September 28, 2018


The Economy is Strong. So Why Aren’t Markets Even Stronger than They’ve Been?
By Tim Courtney, Chief Investment Officer


The U.S. economy is witnessing some of its strongest numbers in recent years, including the longest-running recorded bull market1, record earnings2 and a projected gross domestic product (GDP) growth of 2.8 percent3 – higher than it was at the beginning of the year. Americans are even increasing their retirement savings4 while their homes and investments are providing households with record-high levels of net worth5.


All this good news begs a question: If the numbers are so high, why isn’t the market even stronger? There are three crucial factors currently keeping 2018’s returns from moving much higher.


1. Some returns were frontloaded in 2017: The Tax Cuts and Jobs Act passed last year gave corporations a significant tax cut6 that investors knew would boost company profits in 2018. Once the market assumed the law would pass, this earning growth was partially priced into stocks. Having returns frontloaded into 2017 makes it harder for the market to continue to exceed expectations throughout 2018.


2. Trade war between China and the U.S. wages on: The trade war between the U.S. and China has continued to escalate, with the U.S. recently issuing the biggest round of tariffs yet on an additional $200 billion worth of Chinese goods, and China retaliating with tariffs on $60 billion worth of U.S. products7. The impact of these trade restrictions is likely to hit the Chinese market before the U.S. In fact, the Chinese government has already been trying to grow its infrastructure8 to cushion the blow. However, portions of the U.S. market will be – or already have been – hit as well9. It’s still hard to tell how this will impact our GDP growth in the long run. Until the trade war ceases, we will likely continue to see market apprehension for larger corporations with high percentages of overseas revenues during days in which tariffs are in the headlines.


3. Market expectations remain high: In 2011, we saw about 8 percent profit yield on stocks. Today, that’s been cut to about 4.5 percent10. That’s still relatively good, but it’s only about half as much as seven years ago when the bull market was still in its infancy. As prices rise, expectations rise and the results needed to push prices higher become more and more extreme. That means we would need to keep seeing great news in order to positively surprise the market and grow at a faster pace. The market is becoming harder to surprise, and in response, isn’t reacting as strongly to good news.


These factors may be stunting market growth in the near term, but we’re still seeing strong returns alongside a strong economy. That said, we should remain invested but avoid allocating all our assets to areas of the market with sky-high expectations. We think that maintaining a diversified portfolio of U.S. stocks – including companies that must keep clearing the high bar set by expectations, as well as those priced with lower bars to clear – is the best way of capturing the returns markets have to offer.


Sources:
1 CNBC.com –This bull market could become the longest in history this month
2 CNBC.com – At this pace, earnings growth will top the first quarter's record 26% increase
3 CNBC.com – Fed raises 2018 outlook for US economy
4 The Motley Fool – More Americans are increasing retirement savings, survey shows
5 Reuters – U.S. household net worth almost $107 trillion in second-quarter 2018
6 Bloomberg – Trump tax cut is the gift that keeps on giving
7 CBS News: China raises tariffs on U.S. goods, accuses Donald Trump of “trade bullyism”
8 South China Morning Post – China goes back to old habits as government pumps up spending on infrastructure to boost economic growth
9 CNBC.com – US farmers could take a significant hit from trade war
10 Standard and Poors – S&P 500 trailing 12 month earnings divided by price on 9/30/2011

 

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About the author

4054781971

tcourtney@exencialwealth.com

Oklahoma City, Ok

Chief Investment Officer

Tim Courtney serves as Chief Investment Officer of Exencial Wealth Advisors and chairs the investment committee. He attained the Certified Investment Management Analyst (CIMA) designation in 2005 a... CLICK HERE TO READ MORE