This is the time of year when traders, portfolio managers, and economists look back on the year and amend views that haven’t worked out. It’s catch up time and it often helps to review the past for clues about what may come next.
We entered 2017 with equal measures of optimism and uncertainty. Politics, culture, and economics have all collided this year, but it has been people’s optimism about their condition and their prospects for a better future that have influenced the markets most. We have seen discipline and innovation come forward in industry, fueling increased employment and productivity. There is a lot to be positive about.
The US bull market in stocks has reflected strong the earnings growth and economic conditions that have led recovery across the developed world. For the first time in several years those economies are catching up to the US and we are seeing growth across most global markets.
The current bull market is now eight years old, having begun in early 2009 following the economic crisis and market washout of 2008. Markets rarely move in a straight line, and during this period the US stock markets have experienced three periods of acceleration, separated by two periods of pause/worry/decline.
The market peaked in May of 2015 after a strong two-year rally. This market peak was followed by a sharp decline, beginning in the fall of 2015 and carrying on into the spring of last year. These market corrections included three violent drops that corresponded to six consecutive quarters of declining earnings, capital investment, and revenues for U.S. companies. Fortunately, US economic measures turned positive in the middle of 2016 and have been positive ever since. US stock market prices have followed these economic trends for the most part, even as partisan politics and worries over US and global debt levels fueled concern.
Since early 2014 markets in Europe, Japan, China and the “Emerging Markets” (everyone else) have been in cycles of their own. For the last three years they have lagged the U.S. economy before shifting to growth trajectories of their own. Europe’s economic woes seem to have bottomed late last year while fears that China’s economy might overheat also proved to be unfounded. Even Japan, which has suffered through a stalled economy for years, is showing positive economic signs.
The 24-hour news cycle continues to affect daily market behavior, but only economic events and corporate earnings truly change market trajectories. The market always seems to come around to a long-term view. Two factors that have had continued to influence global markets are the price of oil and the policies of the global central banks. Policy decisions by the U.S. Federal Reserve, the European Central Bank, the Japanese Central Bank and China’s Finance Ministry affect the price of the dollar and other foreign exchange markets, which in turn impact export and import prices, values of commodities and money flows. For now, these institutions seem to be working well together to foster sustained growth in the global economy, all while moderating inflation.
We feel the present economic picture reflects a positive environment for equities, not just in the US, but across the globe. While this economic situation can change at any time, we remind ourselves that as investors we look toward the larger trends that endure for more than a few days, weeks or months. At Calyx we have positioned our client portfolios to reflect this view, and while it is quite possible that news events will cause markets to gyrate up or down, we hope to stay the course.
This chart shows several measures from the ISM Manufacturing Survey. The black line is the composite. All of the measures show a topping in 2014, a decline through 2015, and a turnaround to growth in 2016 and 2017. This chart is a good example of long-term trends being useful for understanding where we are while the monthly ups and downs are too volatile to be useful for predicting, even though the talking heads will do so every month. It is also a good example of a set of measures that led the stock market down and then back up by six months.
Market history tells us that trends persist until an event triggers a broader readjustment. When the trigger event occurs, market momentum does not turn on a dime, but takes weeks or months to develop a new course. We monitor specific economic indicators that have had strong high correlation with market tops and bottoms in the past. This past summer some shorter-term measures suggested we pay attention, but none of the longer-term measures raised Red Flags. While this condition could change in a few weeks, we remain encouraged.
Remember, patience is always the best investment.
God bless you,
Ed & Branson
At Calyx, we help families protect and manage their financial resources. We are a financial advisor and investment manager that partners with our clients to administer their financial affairs with personal attention and active risk management.
Calyx is also an advisor to several not-for-profit charitable trusts and endowments, working with committees of faith based organizations to preserve their legacy while providing operating income. We are sensitive to the investment needs of these clients while working within the guidelines they have established to reflect their principles.