Drifting Sideways With Hope

Well, folks:

It should be quite clear that the market as of late has not kept pace with the strength of recent earnings growth. Given the fairly full pricing of securities for the past year, a slowdown in the growth of price:earnings ratio isn’t a bad thing. Investors over the last twelve months have been lured into believing that the strong earnings growth momentum and price appreciation was now part of the new permanent investment landscape. The earnings evidence has certainly done its part by being quite convincing.


Through Thursday, May 16th:

91% of companies reporting

87% registered higher earnings

12% reported earnings

Yet despite all of the good news, market appreciation appears to have slowed a bit. Concerns about rising rates and trade tariffs, paired with a recorded drop in consumer confidence and corporate reinvestment rates, could have been a contributor to a modest first quarter’s investment results.

One interpretation of the sluggish market in response to robust earnings could be a growing belief that we are reaching a market peak in performance. Yet corporate balance sheets are flush with cash from strong profits and lower taxes. This wave of liquidity could usher in a period of corporate stock buybacks, mergers, acquisitions and stepped up capital spending. Equities which have seen their price:earnings ratio contract to more reasonable levels in the last several months, could resume being seen in a more favorable light.

It is likely that we will see performance differentials among industry groups and regions. What happens to the President’s policies on tax and trade (which seem to be trotted out when the need arises)? This could certainly affect a large basket of U.S.-based multinationals and is somewhat unpredictable at this point. If U.S. and global trade continues to expand we should expect a good environment for the following industry segments:

1. A rising interest rate environment should favor Financials.
2. Floating rate Bonds will adjust to higher interest rates with a reset function that will elevate yields.
3. Technology that enhances productivity will continue to be in demand.

4. Energy sources that can enhance domestic and global commerce should rise in value.
5. Health Care services will expand to meet the needs of aging populations both here and abroad.

Unlike 2017, volatility is back and meaningful. Short-term advances and declines were the old norm that has now returned. Point moves of 200 - 300 + or -  are really quite small against the total value of the equity market. It continues to be the underlying earnings of companies and their future prospects that count and will be recognized in the value of our holdings.