We saw a sharp reversal in the first quarter of this year following the initial “Trump Rally” (It’s silly, I know). Following the election, US stocks, value and size in particular, went on a wild ride, while international markets languished. Fast forward just one quarter (One quarter!) and we have seen the exact opposite occur. International outperformed the US, while momentum overtook value and size for the factor crown at the moment. But you know, we can predict short-term movements and we saw this coming right?
Still, the recent past has been very kind to investors. Looking at those 1-Year numbers, it would be hard to find much to complain about, unless you were heavy in long-ish maturity government bonds, a well diversified global portfolio has continued to provide solid returns. Will that continue? You know that answer…
Taking a quick peek at global valuations and we see the trend of the recent past continuing. US stocks are “expensive” compared to the rest of the globe. So are US stocks bound to crater soon? Possibly, but I have no due date for you. As always, my takeaway is that now is NOT the time to abandon or underweight international stock allocations. Yes, 2009-2015 was a roughhhh stretch for non-US stocks, but we have started to see some indications of the trend reversing, especially in emerging markets. Mean reversion can be a friend or foe, so continue to be patient.
Unemployment continues to remain low. I will point out, and this is a theme with almost of all of the economic charts to follow, that it may be putting a bottom in. We are starting to flatten out down there around 4.8%. Besides that speculation though, this indicator looks healthy for now.
Retail sales is one of the healthiest charts we have. There seems to a be a new little uptrend going on, which is great to see. Outside of the brief breakdown in Feb. 2014, this indicator has been very strong in the recent recovery. As always, keep buying stuff…
Industrial production got back to positive in the most recent quarter, which is a great sign. This indicator has been one of the weaker ones in the recovery, but with the massive energy drop in 2015 and the growth of our services-based economy as a headwind for this type of indicator, it is good for now.
Another indicator that went negative very briefly in 2016, only to recover and looks to be attempting to create a new uptrend is Labor Participation. We will see where this goes, but it is remarkable to see how resilient all of these indicators have become this far into an expansion (Anemic or not).
Housing starts keep chugging along. In terms of volatility, this recovery has seen a very slow and steady growth in housing starts. It actually is very nice to see that in an indicator. Nothing out of control here yet.
Lastly, we have corporate profits, after tax of course. After giving everyone a scare in late 2015/early 2016, profits have come roaring back and are as high as their 2012 levels.
Yes, every economic indicator we look at it is currently positive. It’s great actually. Yet, we cannot get away from a lot of people waiting for the shoe to drop. Part of that comes from the scars that 2008 left, and part of it comes from valuations and pessimism surrounding Trump.
Take a look at the following chart. It is actually quite remarkable how split this is right now.
- Valuations by almost any measure are telling us the stock market is very expensive
- Sentiment is slightly bearish most likely because of the political climate
- Economically speaking, there does not seem to be any recession on the radar
And so, the most hated recovery continues. This recovery has been frustrating for many and it underscores just how important having a plan is. I have said it before, I have no problem if you approach markets with a strategic or tactical focus as long as there are clear rules in place.
Too many people have missed out on what has been for some brave investors out there, a “life-changing” recovery. You read that right. Since the bottom in 2009, the iShares MSCI ACWI Index Fund (ACWI) has returned approx. 14% per year. An investor would have earned almost 200% by now. So yes, if you had $1,000,000 in stocks in march 2009, that is worth almost $3,000,000 in just 8 years. That is “life-changing”. I hope you got a piece.
Have some fun out there!