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Any Growth Challenges Equals Lower Stocks

CAMS Weekly View from the Corner – Week ending 3/23/2018

March 26, 2018

“The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011. https://www.conference-board.org/data/bcicountry.cfm?cid=1

If you are a consistent reader of our Weekly Views I am sure you can tell us what our overriding central theme, if not mantra is relative to the big backdrop; think an absolute must have of strong economic growth to support our historically highly valued markets.

Some would call these markets so highly valued that they are “overvalued” – a favorite phrase of some market observers whereby they are inherently suggesting said market has no business being where it is and is destined, if not guaranteed to fall and fall considerably.

For my part personally, that phrase is one I stay away from in light of said inherent message; it offers that the individual knows far more than collective market participants and can clearly see the future without any doubt or shortcomings.

For me personally, I prefer the metaphorical image of standing in a crow’s-nest, high above the market landscape whereby the historical highly (think “overvalued”) valued markets can be clearly seen and yet offers a view for what the collective wisdom may be “seeing” far out in the distance in terms of notable economic change – i.e. growth.

With this growth, perhaps, comes with it an economic and hence earnings sea change (remember earnings are the literal lifeblood of a company’s value and hence stock price) that would boggle the current day mind under the “unexpected” surprise category some time out there in the future when looking backward.  Yes, a market observation mode of “back to the future.”

The problem with the positive “unexpected” economic sea change against a highly valued market is if it does not appear.  Here then, surely the overvalued phrase and its inherent message of falling downward becomes befitting to be certain.  This brings us front-and-center to our recent experience of market volatility – think, up, down and all around kind of activity.

As shared here in numerous Weekly Views the economic backdrop has been and continues to be solid.  Today’s header quote is yet another add-on to that point.

Importantly though, markets are forward looking and even if an economic measure such as the above referenced “LEI,” which is designed to be forward looking months into the economic future, points to continued growth other larger issues can cloud the expectations of future growth.

Front-and-center on this note is recent tariffs and the concern of escalation to the point of harming said expected economic growth.  Markets do not like uncertainty, in particular highly valued markets as it clouds the forward view.  Any clouding equals volatility.

As we stand currently, expectations and indicators point to continued growth, tariff concerns aside.  If said tariffs lead to a notable global “tick for tack” then said growth will be more questionable.

LEI - 3.26.18

We will leave you with the most recent picture of the Leading Economic Indicator measure produced by the Conference Board.  It is designed to point out into the near-future in terms of expected strength of economic growth.  The blue line continues to charge notably higher.

Importantly, for the time displayed here since 1999, when the LEI (blue) line is charging higher economic recessions are not on the horizon.  It is an economic recession that will bring a certainty of much lower stock prices and hence the phrase overvalued will be fitting.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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