Broker Check

Correcting the Economic Disconnect

| November 06, 2018
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Over the past few weeks we have discussed about the ongoing disconnect of equity market prices to the fundamental well-being of the economy.  Although we know that the economy is not the equity market, the two can often complement each other in a way that promotes higher equity market prices through the likes of healthy consumer consumption, a strong labor market, and strong consumer sentiment figures.  As we step back and gauge the current economic landscape, and as we further overlay the current health of the quarterly earnings season, we continue to witness a divide between the current status of the economy and the behavior of global equity markets.  Media outlets have used this disconnect to wedge a fear factor across investors.  The reality of it all, however, is that the current environment has provided a unique opportunity for investors to increase, or initiate, global equity market participation.  After all, global equity markets are on sale!  When such sales become apparent, and if the overall backdrop remains healthy (as is the case now, in our view), then the potential for a successful long-term outcome remains intact. 

Domestic economic news remained highly positive during the week, especially as it relates to the labor market.  The economy added 250,000 private jobs in October (versus the 200,000 expectation) and the crucial annualized wage growth figure was announced at 3.1%.  Such growth in hourly earnings is the highest since 2009 and is one of the most important indicators of consumer health, in our view.  Wage growth above 3% has been a largely missing component of the stellar labor market performance for the previous three years and the current trend appears promising.  The upside to larger paychecks, however, can lead to the potential for higher inflationary pressures as well as rising interest rates.  We’re keeping a close eye on such developments as a means of gauging systematic risk.  One of the most positive components of the report was the increase in payrolls tied to manufacturing, which were announced at 32,000 new jobs versus the expectation of just 16,000.  This may mean that the negative sentiment tied to tariffs may not be as detrimental in the short-term as had been anticipated.  As data economic becomes more positive, or remains in its current track, the decision to raise interest rates by the Federal Reserve will become easier.  As this materializes, it’s important to keep in mind that fixed income investments (i.e. bonds) may further lose value given their inverse relationship to interest rates.  Through the end of the week, the Barclays U.S. Aggregate Bond index is down 2.65% year-to-date.  By comparison, the MSCI World Equity Index is down 1.13%.  Meaning, despite the recent equity market volatility, equities are performing relatively better than the perceived safer investments tied to bonds.  For those investors with at least a 10+ year horizon, increasing equity market participation through the Credent multiple strategy platform may be able to enhance long-term success. 

Additional indicators during the week revealed that consumer confidence figures, through October, remain at record high levels (as reported by the Conference Board).  The previously mentioned wage growth figures may have aided such sentiment given that consumers are now taking home larger paychecks.  Moreover, from an equity market standpoint, the quarterly earnings season remains in high gear and has posted positive results.  Approximately 76% of companies within the Standard & Poor’s (S&P) 500 have reported earnings with a weighted earnings growth rate of 26.49%.  The index gained 2.45% for the week. 

Investment Policy Committee:

 

Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

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