Winter Economic/Market Update

Continued Growth & Volatility Returns

While the fourth quarter showed continued economic improvement our economy and the Eurozone, we have experienced a roller coaster ride in stocks that hasn’t been seen for a long time. What does it all mean? We will try to explain.

Let’s start with the economy. Fourth quarter GDP came in at a positive 2.6%, not above the 3.0% that was hoped, but strong nonetheless. Positives for the report included strong consumer, business, and government spending, along with a healthy rise in durable goods orders. Consumer spending is the most important component to look at since it accounts for over two-thirds of our overall economic growth. The biggest negative was inventories, but the drag this past quarter will provide a positive in the first quarter as companies restock their products. Combine that with strong ISM* growth, we continue to be hopeful that our economy has truly turned the corner.

Not only has our economy shown growth, but the Eurozone is showing continued improvement, with 2017 growth being the strongest in 10 years. This trend is expected to continue through 2018. These two factors along with strong consumer sentiment bode well for the balance of the year.

What about the correction earlier in February? 

With the big drop we saw in equities earlier in February, one wonders if the other shoe is about to drop? Our view is that won’t be the case. A few factors have caused this, but the biggest thing is the strength of our economy. With economic growth comes increased inflation, followed by higher interest rates (eventually). The market fears that such future rate increases may slow growth. While this may be true in the long run, it’s important to remember that we are coming off of historic low-interest rates, so the rate hikes are to be expected. Many point out that in the past, that an increase in interest rates was followed by fall in the stock market. Keep in mind that in the two most recent downturns, early 2000’s and late 80’s that the 10-year treasury note was significantly higher (6.7% and 8.0 % respectively) than today’s 3.0%. So while higher rates can be troubling, at this point in the rate cycle, it isn’t something to be overly concerned with.

While we believe we are on a solid economic footing, it needs to be emphasized that another significant equities drop may occur.  Our opinion now is that we will see some more recovery. The market hasn’t experienced a 10% correction in a very long time, and while it may seem counter-intuitive, the article** linked below helps to explain that reasoning very well.

Are you on track to meet your goals?  

Finally, as we always mention, it is critical to have a coherent portfolio strategy in line with your risk budget. That, along with periodic reviews with your advisor should help you improve the odds of meeting your financial goals. If you already work with one of our advisors and want to make sure your portfolio matches your financial goals and risk budget, please contact us by clicking HERE.

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Good luck and happy investing from the Athena family.

* An ISM reading above 50 indicates growth and both the manufacturing and non-manufacturing (approximately 2/3’s of our GDP) components remain in the mid to upper 50’s. The importance of this release is that it is a private, non- government, release that polls businesses of all kinds across the country, so government bias is minimized.

**https://www.fool.com/knowledge-center/6-things-you-should-know-about-a-stock-market-corr.aspx

Investment Advice offered through Athena Advisor Services, A Registered Investment Advisor.