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Incomes Ultimately Support Asset Prices

CAMS Weekly View from the Corner – Week ending 10/6/2017

October 9, 2017

Ultimately something has to give in that we either see a significant increase in wage growth (2% range will not cut it) or a significant lessening (or worse an actual decrease) in the price growth rates on the National Home Price Index.   Home prices growing 5% and higher annually with simultaneous 10% stock market growth against a 2% wage growth backdrop (i.e. near 0% when factoring in inflation) walks us into a massively overextended pricing backdrop for both markets. (Excerpt from: Two Markets That Are Speaking the Same Language, Weekly View October 2, 2017)

Sprinkled throughout various Weekly Views of recent months we have addressed asset price growth rates in context of various economic measures.  This has been shared to help give a sense of where we are on the value spectrum of various markets.

Ultimately, as in the long run, valuation levels are a significant determinant of long run returns throughout markets.  Simultaneously, those same valuation measures offer little help on the timing of when markets may have a problem if valuation levels are high or even extreme.

Per the header quote above, we recently addressed some basic numbers of price growth rates with the Real Estate market being a central part of that View.  Real Estate is a market that offers a notable multiplier effect throughout the economy.  When sales occur within this market numerous industries experience a demand increase as the process multiplies through the economy.

The price growth rates relative to various income growth rates is a developing concern.  With the broad economic multiplier effect in mind and the potential for sale slowdowns in light of price growth rates far exceeding income rates; it warrants being on our watch list.

Real Disposable Personal Income

A key ingredient of our general watch list that also acts as an important piece in the Real Estate market is how income growth rates are looking through various measures.

The chart addresses an important measure known as Real Disposable Personal Income depicted over the last five years.  Disposable Income is simply the amount of income left after taxes are accounted for and the “real” part takes into account the level of price inflation.

With this, the above takes into account what we have left after taxes and inflation take their bite out of our incomes.  The chart depicts the percentage growth rate.

As shown we see over the last five years this measure has spent most of said time trending down with the exception of its run from negative to positive growth in 2014.  Here in 2017 we have seen a bump up off the zero growth level with a follow-on flat-line view since March which represents just over 1% growth currently.  As an interesting aside, home sales peaked in March.

We need to see stronger economic growth with follow-on stronger income growth rates to support some of these key markets.  Their price growth rates have significantly exceeded income rates for a long run now.  The above measure was released just a week ago so little has changed on this income growth rate front as of now.

Through the lens of markets and valuations we need more growth to support their current levels.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


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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