We all love a bull market, as investments stampede higher, and dread a bear market, as these same investments pull back and go into hibernation. In 2016, we described for you the less-often-heard of “buffalo” market, identifiable by its range-bound behavior with investments neither gaining nor losing appreciably. We now turn to the current “bunny” market, characterized by jumpy moves up and down in stock prices.
Markets have become more volatile in early 2018 as powerful head and tailwinds collide. The potential for a trade war has been one such headwind. There has not been a genuine trade war in more than 90 years, so the possibility of such, and the ensuing economic damage it would cause, is worthy of concern. But most economists do not believe we are headed towards anything beyond a trade “spat.” Canada and Mexico have already been exempted from steel and aluminum tariffs, and we are currently negotiating exemptions for the European Union and Australia. Not exactly the makings of a trade war. But we will continue to monitor the situation.
Inflation concerns also appear to be overdone. In February, the Bureau of Labor Statistics announced that wages had grown by 2.9 percent over the previous 12 months – a record high for the current expansion. This seems to have triggered fears that higher wages chasing a finite number of goods and services would lead to higher prices and, furthermore, that higher prices would encourage the Federal Reserve to raise interest rates to combat inflation.
But warnings of incipient inflation have been both persistent and wrong since 2012. The Federal Reserve has routinely aimed for 2 percent inflation in the years following the housing crash, and its aim has been routinely low. In 2016 and 2017, wage growth accelerated for lower-income Americans. But annual growth in “core personal-consumption expenditures”—the Fed’s most commonly used inflation measure—was 1.7 and 1.5 percent in those years. Wages perked up a bit. Prices didn’t. While investors are still fearful of a heavy-handed approach to fighting inflation, a recent publication out of the St. Louis Fed titled “Why is Inflation so Low” suggests that the Fed may see evidence of inflation remaining lower for longer than expected. While rising inflation is certainly worthy of close scrutiny, the recent trend may persist a little longer.
In terms of tailwinds, or harbingers of good things to come, the list is long and encouraging for the holders of stock-based investments. Employment, disposable income, manufacturing, tax reform, and repatriation of overseas cash reserves are among those things pushing the economy higher. Consumer confidence is now at its highest level in well over a decade, and a confident consumer is a spending consumer.
As we’ve said before, when it comes to stocks “It’s all about earnings.” As owners of stock we are owners of businesses. And as owners of businesses we are most concerned with the current and future profitably of our companies. As you can see from the graph, earnings for U.S. companies have been very strong of late and are projected significantly higher this year and next. International equities appear to be trending even more strongly in that same direction.
We do believe risks are rising. But taken as a whole, we expect positive forces to move this secular bull market forward over time. As such, we are confident in our equity positions, recent increases to international stocks, and our buffered note holdings.
Wade Daniel is the Chief Executive Officer at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.
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