However, this bull market, built on eight years of growth, is starting to show some signs of age. Corporate profits earned by our large multinational companies came in well above expectations in 2017. This in part came about because of a fairly robust rate of growth/recovery among the world’s leading Developed Economies. However there are some cautionary signs worth noting. According to FactSet the pace of earnings growth for the first 3 quarters of 2017 declined measurably as follows; Q1 -14%, Q2-10%, Q3-6%. The P/E ratio of the S&P 500 currently at 18.2 vs. the All Country World Index (ACWI ex US) at 14.3 makes the current price of US stocks a little expensive.
Our ability to grow our economy is being severely strained by the number of available people to fill the current demand for labor. Chart 24 on Unemployment & Wages provided by JPMorgan illustrates 2 looming problems. An Unemployment Rate dropping below 4% and Wage growth on the rise. These competing trends are likely to produce a spike in wages, as companies must raise wages to acquire the workers needed. Chart 25 also provided by JP Morgan also illustrates in the upper right hand corner the reasons for our shrinking labor pool domestically.
The Eurozone, which started somewhat later in their stimulus program than the U.S., has had 4 strong years of growth and had an 8.8% unemployment rate as of October 2017. They have people ready to be employed! I think moving several percentage points of our U.S. dedicated Equity Dollars (say 3-4%) here makes sense.
On the Fixed Income side, both High Yield and Floating Rate Bonds still make sense. The 3 or 4 rate increases coming this year should benefit the Floating Rate Bonds.