What to Do with Good News

February 26, 2018

The good news continues to roll in for the global economy. As we discussed at last week’s investor conference, one of the most prominent features of the current global expansion is its breadth, as almost every part of the world is growing. However, the most recent forecasts for global growth had a new feature, ‘acceleration.’ For example, the most recent World Economic Outlook released by the International Monetary Fund (“IMF”), on January 22, now predicts 2018 and 2019 growth to be stronger than 2017. The IMF cited the new US tax law as one of the primary reasons for the increased growth expectations, as US growth forecasts rose from 2.3% in 2017 to 2.7% in 2018. The increased US growth pushed global growth forecasts from 3.7% in 2017 to 3.9% in 2018.

 

Meanwhile, despite the old age of the current US expansion we see little signs from the ‘usual drivers’ of recessions. Inflation still appears to be tame, and the Federal Reserve policy cautious and accommodative. Oil prices are low and strong US supply significantly reduces the risk of oil price shock. US consumers have strong balance sheets and are not over-consuming through debt. You could say that consumers are positive but not irrational. Likewise, US companies have strong balance sheets and are investing, but not over-investing through debt-fueled capital spending. Overall, the economy appears to be staying in the ‘sweet spot’ of strong growth without overheating. 

 

In fact, it is hard to find bad economic news, and in an odd way that is part of the problem. The stock market knows all of this good news, and it is reflected in current prices.  Times and good and the stock market is pricey. We caution our clients from getting caught up in all the good news as a reason to abandon long-term strategy and chase the stock market by increasing risk. Buying more stock when times are good and selling stock when times are bad may sound like a ‘smart’ strategy, but it is actually a good way to destroy your investment returns, underperform the market, and lose money. 

 

So here are a few reasons to remains cautious and not chase the stock market. First, current valuations are above average by almost every measure, and by some measures, valuations are very high. Secondly, the current expansion is one of the oldest on record, and almost certainly late in the business cycle. Remember that the stock market is forward looking and will adjust to future expectations before they occur. While the odds of a recession in 2018 or 2019 are very low,  the odds of a recession in the following years are quite high. Lastly, there are beginning signs of inflation, and that could mean more swift action by the Federal Reserve to slow the economy. Yes, inflation is low, and the Federal Reserve is cautious, but there are signs that inflation could be heating up. For example, the Average Hourly Earnings spike at the end of January was an early indicator of inflation. The market correction in February can be seen as an adjustment to new inflation expectations from this new data.

 

Times are good, and it is certainly a great time to be invested in stocks. However, it is also important to remain disciplined even during the good times. We still believe in long-term, goals-based strategies, and disciplined, value-based investing. If you would like to get your own plan, please feel free to give us a call. 

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