Market Commentary – February 2018

“Every single leading economic indicator we know about tells us that the economy will continue to expand over the next 9-12 months. A growing economy should provide the underlying support needed for ongoing corporate earnings gains and, with the added help from the Trump tax cuts, we could very well see 13-15% earnings growth for the S&P500 in 2018”

                           – Myles Zyblock, February 2018

“Refrain from joining the crowd.  Additional weakness should be viewed as a buying opportunity as the secular trend remains powerfully bullish.  For one thing, the global recovery is accelerating and with tax cuts, deregulation, and the upcoming Infrastructure Bill, earnings will continue to surprise on the upside.  For another, the market’s technical structure remains sound.  The long bases completed by so many stocks in so many sectors and in other countries suggest that this bull market still has a long way to go in terms of time and distance.”

                                  – Leon Tuey, February 2018

The S&P500 had one if its best starts to a year in January – and then in February, volatility increased and the market started to correct.

Putting the recent volatility in perspective:

  • Volatility and corrections are a normal part of equity investing. Quite often they are a healthy pause that takes some of the froth out of the markets
  • A correction of 10% occurs about once a year on average. Corrections of 5% take place on average about 3 times per year
  • It is incredibly difficult to time short-term pullbacks in share prices and quite often they bounce back significantly within a month or two
  • Despite these regular corrections, Ibbotson Associates showed that markets were positive 65 out of 89 years from 1926 – 2014

There are really two types of corrections. Smaller declines of 5%-10% are like an emotional knee-jerk during relatively good economic times. Larger bear markets, with 20%+ drops, typically happen during an economic recession. These are the ones we want to watch out for. It would be reasonable to expect us to move some of the portfolio to cash or defensive positions if a recession is looking likely. However, we don’t expect to see a recession in 2018.

  • For the first time since 2007, all 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) are on track to grow in 2018, and growth in roughly three quarters of these economies is accelerating
  • Volatility has been grabbing headlines and has perhaps taken attention away from the stellar filings coming in this quarter. We are now past the halfway mark of Q4 reporting season and S&P 500 quarterly year-over-year earnings growth stands at +13.6% and well ahead of the +10.9% consensus forecast.

Growth looks solid across the globe.  Despite recent volatility, all our indicators are still positive.  Unless something changes significantly, we expect to be fully invested in the coming months and quite likely for the remainder of the year.

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