“Your present circumstances don’t determine where you can go; they merely determine where you start.”
~ Nido Qubein, President of High Point University
Question: Your last column was on the length of this bull market. What could end the positive momentum?
Answer: The same factors that cause markets to go up can bring them down. Detrimental changes in employment figures, consumer confidence, interest rates and inflation could contribute to a reversal. The wildcards or so-called Black Swan events could be terrorism and trade wars.
Fourth quarter 2018 is expected to show growth, albeit slower growth. Our unemployment rate is a low 3.9% according to the Bureau of Labor Statistics (BLS). Fewer government regulations inspire companies to add workers. Consumer confidence is near an all-time high according to the Conference Board. Companies are more likely to make capital expenditure (CAPEX) improvements when confidence is high, increasing productivity, sales and presumably earnings.
Stock prices are based on future earnings. If employment and capital expenditure data were to sharply reverse, it may lead to downward pressure in stock valuations. According to Raymond James Chief Economist, Scott Brown, the U.S. economy remains in good shape, with moderately strong growth, a tightening job market and moderate inflation.
With the lowest unemployment rates in 18 years, the number of people on disability is declining. The Social Security Administration even retracted the statement that the disability system could run of money by 2023. More workers equal earned income, tax revenue, and consumer spending all contributing to economic growth. There’s no indication at this time that this data will abruptly reverse.
Interest rate increases and trade war discussions are also in the news causing some to be concerned about a recession. Higher rates indicate that our economy is strengthening increasing the cost of borrowing. Trade tariffs with China will be a long process with the outcome unknown. We do have clarification of a deal with Canada and Mexico. One issue will be the timing for Congress to approve this deal. Trade Wars could dampen profit growth. Yet, corporations have strategic plans that include project spending for future years, likely taking into account the possibility of trade wars, some of which could be offset by tax reform package benefits spread evenly across the next three years.
Slowed growth is not the same thing as a recession. The National Economic Research Business Cycle Dating Committee defines a recession as when there’s a significant decline in economic activity that spreads across the economy lasting from a few months to more than a year measured by real personal income, real business sales, industrial production, and nonfarm payrolls. None of these suggest that we’re approaching recession territory currently.
Dramatic changes in employment, confidence, inflation, and interest rate figures will be the telltale predictors of a recession. At the moment, this ten year old bull market has no expiration date. Nor are we experiencing the feelings of excess and euphoria that may signal the end of a growth cycle.
Markets are cyclical. The last contraction began in November 2007 and ended in February 2009. The warning sign at that time was the inability to repay debt. Understanding the quality and potential risk of investments assists investors with understanding the fundamentals and facts that drive market cycles.
There’s always something to worry about, especially in the midst of a long cycle secular bull market. The next hurdles are mid-term elections and trade tariffs. According to Ed Mills, Raymond James Washington policy analyst, “We have long said that, in D.C., nothing is ever as bad as you fear, nor as good as you hope.”
Floridians know the importance of having a hurricane plan in place. Typically it doesn’t include permanent relocation to another state. The same holds true for portfolios. A financial plan may assist with your ability to more confidently steer through challenging times.
We’ll surely experience modest recessions, and even a few market drops of 20%. The economy, consumer confidence, employment data, and most importantly, earnings all remain strong. Stay focused and plan accordingly.
All investments are subject to risk. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. There is no assurance that any investment strategy will be successful. References to dates and market movement Andrew Adams, CFA, CMT Senior Research Associate Raymond James.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.