Spring Economic/Market Update

Daniel K. Stecich
VP Economic Research

An economy in Mid-Cycle?

The first quarter is behind us with GDP coming in at 2.3% for the first quarter. That's not a great release, but the economic condition of our economy still seems to be healthy. The quarter saw slower consumer spending, but this was balanced by strong business investment and exports. These are all signs of good economic conditions, typical of the middle part of the economic cycle.

Strong Corporate Earnings

In addition to GDP, the earnings season is ending and has been one of the strongest quarters in many years. Well over 75% of companies reporting not only beat expectations but at a rate of almost 6%. This bests the normal beat of 3-4% we have recently seen.  Additionally, economic data has been consistently strong across the board, with ISM* figures continuing their strong showings, 56.8 for non-manufacturing and 57.3 in manufacturing.

Approaching Full Employment

Finally, employment has been the strongest we have seen since 2001. Unemployment is below 4% with more jobs available than people seeking them. There has been some slowing in the Eurozone, but nothing that should raise any red flags soon. All in all, we are looking at one of the most promising economic scenarios that we have seen since 2006. Such great employment can lead to inflation, but this isn't showing up just yet.

So why the recent volatility? 

With all this evidence, one would think that equity performance would be stellar in 2018. And yet so far, stock indices are about where we started if not a little lower. What is going on? Current presidential policy challenges a lot of conventional wisdom. This creates uncertainty. Markets hate uncertainty and we currently have buckets full of it. The low interest rates and high valuations of stocks add to the uncertainty.

A couple other areas of concern are rising oil prices and the perpetual Mideast problems. Oil is a double-edged sword. Higher prices take away spending power. This also indicates a stronger economy and increased demand. While we don’t like higher gas prices, the economic uptick makes it more bearable. As far as the Mideast, we can never tell what might happen there, but our sense is that no drastic events will arise anytime soon. There is a lot of flexing now that the nuclear deal with Iran is over. But the early bluster will likely recede with a more balanced approach toward the problem and hopefully a sensible resolution.

What next?

How will it end? Nobody knows, but our sense is that if a clearer picture emerges (and we believe it will be a positive one) and the fear recedes, the markets could regain their footing and the rally could continue. For the longer run, experts are expecting lower-than-average returns for the coming 5-10 years from this point.  While this might seem problematic (if they are right), it could offer an extended opportunity to accumulate shares of investments. After all, good investors should buy low, right? Also, volatility often creates opportunities for the long-term investor.

Finally, it is imperative that you sit down with your advisor(s), review your financial priorities, risk budget, and change your plan as necessary. Remember, we are investors, not traders. And in the long-term, markets tend to reward investors.

Good luck and happy investing from all of us here at Athena!

* An ISM reading above 50 indicates growth. 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 non-government release that polls various businesses across the country. This minimizes government bias.