Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
You Got to Know When to Hold ‘Em
Last week’s G7 meeting brought to mind Kenny Roger’s “The Gambler”
Once again we are reminded of the importance for investors to separate the signal from the noise and practice patience—a virtue too often underrated in an impatient “resolve it for me now” world.
The G-7 meeting that adjourned over the weekend had ended on as positive a note as one might have expected only to be followed by a volley of elevated rhetoric between Canada and the US, which some fear could destabilize Nafta negotiations.
As strategists we are politically agnostic as it is not our role to take sides but rather to look to the effect that political actions and events might have on markets and their constituencies.
So far this year notwithstanding increased volatility in the political and geopolitical realm globally (think China, Europe, Japan, Latin America, the US) the markets—particularly the US equity markets—have shown what many might say is a high level of detachment from the day to day volume of rhetoric worldwide.
The US market has proven thus far remarkably resilient in the face of uncertainties that ebb and flow on a day to day or weekly basis. Some ask if it is market complacency that has kept the market in what we would describe as an acceptable range as investors move in and out of “risk on /risk off” sentiment. We think complacency is not the issue but rather that the markets at least in part due to the global and digital distribution of information have merely grown adept at quickly discounting good and bad news items and events.
The bottom line would appear to be just that—the bottom line—because for some time now it’s been all about corporate earnings results as investors look ahead in an environment that shows enough positives tied to economic and corporate fundamentals to offset the risks real and/or perceived whether it’s trade negotiations, US deficits, the rise of populism in Europe (as evidenced most recently in elections in Italy), monetary policy committed to interest rate normalization at home as well as in Europe and in a number of other regions of the world as well as a host of other issues that point to political polarization between domestic constituencies across the globe.
““Without a significant deterioration to the fundamentals the good times we are experiencing relative to what we had experienced earlier in this economic cycle could continue for some time.”
Instead of complacency it looks to us as if the markets have ascertained from the volumes of data that cross the proverbial transom that as many things have turned sour, even more indicators have turned upwards, or at least show signs of turning positive.
Market skeptics and bears have expressed consternation as central banks have avoided mistakes they had been expected to make. Earnings growth for the S&P 500, the S&P 400 (midcaps), the S&P 600 (small caps) and the Russell 2000 (small caps) in the latest quarter reported showed double digit earnings growth (in a range of 23% and higher).
How long can this keep going on?
In our view it’s the fundamentals that the markets care about. Without a significant deterioration to the fundamentals the good times we are experiencing relative to what we had experienced earlier in this economic cycle could continue for some time.
Interest rates while on the rise appear to be ratcheting higher rather than ramping higher. The effects of lower taxes on corporate earnings may also provide liquidity just as the Fed continues to raise its benchmark rate and further reduce the debt securities it holds on its balance sheet.
It’s not so much a “Goldilocks environment” as a “transitional phase” to pass through as the global economy empowered by developments in technology that are perhaps as revolutionary in their potential impact on the way corporates do business and consumers live as have been the wheel, the printing press, the electric light, the automobile, radio and television and a host of other innovations.
Transitional times invariably generate risk but also deliver significant opportunities.
Much of the current noise around trade negotiations and skirmishes between the US and its trading partners can be attributed to the need to address trade pacts that may have well become anachronisms in a world in which globalization and technology have lowered the barriers of entry to competition in a myriad of businesses (from mom and pop operations to multinational behemoths). The result has been a leveling of the competitive landscape and thus a need to readdress trade pacts that may have given some partners more than what was fair. As unpleasant as the rhetoric around such negotiations may be the ultimate resolution to the trade imbalances that exist today could usher in an era of greater efficiencies and fairness in trade beneficial to participants worldwide.
We suggest investors keep a close eye on the market’s reactions to trade talks and monetary policy but remain patient and vigilant toward opportunities that could emerge as progress not perfection remains the order of the day.
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