MAKING CENTS OUT OF THE NEWS
(January 10th, 2018)
Economic and Market Outlook
By Tom McAllister, CFP®
Happy New Year!
Here in the second week of 2018 I find myself puzzled by and almost overwhelmed by good news and the very positive outlooks of the majority of investment writers and observers. I have been one of these observers for a very long time now. The stock market, on balance and over time, has treated my clients and I quite well. I see very little to worry about in the U.S economic outlook for this year. Which gives me pause.
Historically stock prices tend to be predictors of future economic news rather than followers of what has happened. There are occasional surprises, such as takeover proposals, or the failure of them, that have an immediate positive or negative affect on stock prices. But for the most part the actions of stock market participants in total are based on expectations of what is going to happen, both specifically and in general.
Right now the economic outlook overall seems quite rosy. There are exceptions of course, there always are. But the U.S. economy is now growing at 3%, unemployment is at very low historic levels around 4%, and inflation remains about 2%. The Federal Reserve Board raised interest rates three times last year and has indicated their intention to continue doing so this year. All this is good. But I remain cautious and concerned now, rather than sharing in the exuberance. Stocks at record highs day after day are yellow flags in my opinion.
"Bear" (down) stock markets generally precede a subsequent economic decline. The degree of the decline varies from ten percent to as much as fifty percent. The latter normally happens after exuberant market highs which have been the predictor of ten of the last five economic recessions. That’s right, it often goes down for no apparent reason and no decline happens. We never know how far stocks are going to go up, nor do we know how far they will decline in the next down market. The same is true, of course, of the economy.
All by way of saying that, though the economic outlook looks very strong for year 2018, these new all-time highs are discounting this outlook. We are more likely to decline 10-20% than to continue to rise another 10-20%. All the while the U.S. and its major trading partners should show strong economic progress for the year.
I recommend “weeding your garden” in stocks at this point. Hold on to investible funds. Sell off your disappointments. Put the money aside for now, I like short term preferred stocks for their high current yield. Let the stock markets settle down for now.
Tom McAllister, CFP