CAMS Weekly View from the Corner – Week ending 2/2/2018
February 5, 2018
We had a cluster of economic releases this past week which reflected continued solid economic growth. The central theme of Weekly Views in recent months has been the absolute need for continued solid economic growth as a general backdrop.
Expensive markets demand a good growth environment to support them in that we have to see an economy whereby companies can consistently grow their sales and profits. Ultimately, profits are the lifeblood of company stock prices. If stock prices are to be valued at sky high levels – such as they are now – they absolutely need on-going strong profit growth to support their elevated valuations.
The death knell of a stock bull market (magnified when the bull market has pushed valuation levels to historical highs) is an economic environment that falters to the point of leading to recession. This type of backdrop leaves an expensive stock market “hanging on a limb” so-to-speak whereby an expectation of continued strong profit growth doesn’t materialize and even worse, goes into profit decline.
While a strong or strengthening economy brings with it its own potential problems for an expensive stock market – think namely higher inflation/higher interest rate concerns – a declining economy brings the certainty of stocks experiencing tremendous downside adjustments. Two recent historical examples were that of year 2000-2002 and then the Great Recession stock market experience of 2008-2009.
Built into those highly valued market experiences were for on-going profit growth which failed to materialize. Worse, the economy and profits went into decline and the stock market rout was on.
The common thread weaved through the described economic environments is a highly valued stock market. A “cheap” market backdrop mixed with a strengthening economic storyline can be a near nirvana situation whereby valuation levels have room to move higher even with strengthening interest rate concerns because they are so cheap.
We are certainly not there and hence why these Weekly Views have been obsessed with said valuation levels and the need for growth to support them. Frankly, growth is the only “hope” these types of backdrops have because the opposite brings an assured notable downward adjustment.
The strength and broadness of the economic releases this past week placed market participants solidly in the higher inflation/higher interest rate concern camp. The follow-on was some stock market pullback.
The economy is solid – profits are growing – stock valuations are high – inflation is chirping – interest rates are rising = expect volatility. Historically, 3%-5% pullbacks in the stock market were barely newsworthy whereas currently it elicits crash concerns. With the aforementioned volatility formula in place, we suspect such pullbacks will become more the norm once again. Invest accordingly to your comfort level.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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