Market and Economic Snapshot

Provided by Billy Peterson

Stocks around the world are benefitting from solid economic growth and positive earnings reports.  Inflation has yet to become a factor and is somewhat of a mystery to us. We expect equity markets to continue to attract investment dollars and shares of high quality companies with favorable outlooks to benefit.

While U.S. equity markets have delivered excellent returns so far in 2017, most indices actually trail the returns achieved by the International equity markets. The most common benchmark for European stocks commonly known as EAFE, is up 22.06% year to date as of November 6th 2017 compared to the S&P 500 up 17.66%.  One area here at home that has outperformed European stocks is technology, which has been a major beneficiary of consumer spending. The U.S. Technology index is up 37.68% year to date but some would argue that valuations are becoming a bit stretched in this sector.

America’s economic health has been rather exceptional when you consider the hurricanes, mass shootings and political non-sense that spills out of our television sets on a daily basis. Most of the time we don’t know what to expect from our “leaders” in Washington. What we do know however, is that corporate profits are at all-time highs and a tax cut is a very real likelihood. Even though the federal reserve, with new chairman Jerome ‘Jay’ Powell will be winding down the balance sheet, our economy would need a major event to derail the growth train we are witnessing.  Employment is getting tighter with every new report and finding qualified candidates for specialty jobs is becoming more difficult.  If this continues it will eventually lead us to wage inflation and in turn require the Fed to begin tightening at a faster pace. Someday our growth engine will fade out but we do not expect that for several more years. This isn’t to say that we won’t experience sell-offs (corrections) from time to time. Normal market disruptions occur quite frequently and we are a bit overdue. There is really no way to time the day a correction will begin or the day it will end. Markets can move very quickly and it can prove to be very costly if you miss out on even the 5 best days during any year. Our solution? Stay in the boat. Plain and simple.

Favorable areas or factors:

  • Growth stocks- technology, financial, health care and consumer discretionary are seeing tremendous sales and profit growth.
  • Employment- this goes hand in hand with earnings growth, tax cuts and positive feelings about the future.
  • Housing- new home construction is staying strong. We hear that many sub-contractors are months out on starting new jobs. Existing home sales are being fueled by millions of couples finally being able to move out of apartments they were forced into during the last recession.
  • Overseas markets- Europe and most of Asia are now in self-sustaining market recoveries. Equity valuations are much cheaper in general than here in the U.S.  We have been bullish on International markets for the past 3 years. We expect outperformance to continue for perhaps another 5 -7 years.
  • Agriculture and commodity- these areas have been under great pressure for several years and are one of the few areas that offer upside potential in inflationary environments. We have been adding to specific holdings that provide exposure to these areas.  Oil and gas companies with attractive balance sheets also look very interesting to us at these levels.

Unfavorable areas or factors:

  • Long-term bonds- we have been cautious on bonds for the past couple of years. Our current outlook is even less appealing for bond holders, especially those who own bonds with maturities of 10 years or longer. Rates must eventually move higher. With any sniff of inflation we would anticipate a major shock to the bond market. And it won’t be a good one.
  • Utilities- any asset class that is purchased mainly for its high income will most likely be affected negatively with rising rates. This includes real estate investment trusts (REITs), convertible bonds, preferred stocks, MLPs, and CD’s.
  • Fiscal policy- passing legislation that will lead us to a budget surplus seems like a pipe dream after the post-recession spending we now seem to depend on. No congressman or woman has the fortitude to propose policies that will take away from this addiction to overspending nor do they dare raise taxes in an effort to bring in more revenue. We are stuck in a political house of cards where future generations will someday pay the reaper. Very much like social security, Medicaid, the IRS and most other programs that the Federal Government tries to run. Nothing short of a nightmare.
  • North Korea- What more can be reported. Kim Jong-un is a dictator who wants to have as much power for his country as the major world players. The guy is 33 years old and not worldly wise. If he sets off a nuclear weapon, I think we all know his days will be numbered. Living in fear of this happening is counterproductive.  Think back to the cold war.

As always, we would love to hear from you with any questions about your specific situation. We also enjoy getting feedback from you so keep those comments coming. They help us to develop more meaningful content and customized solutions for our clients.

This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Billy Peterson and are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no assurance that any of the economic trends mentioned will continue or that any forecast provided will prove to be correct. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The Dow Jones U.S. Technology Index, a member of the Dow Jones Global Indices® family, is designed to measure the stock performance of U.S. companies in the technology industry. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

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