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This Economically Important Loan Category Accelerates

CAMS Weekly View from the Corner – Week ending 1/11/2019

January 14, 2019

In the previous year we have consistently offered that markets are historically highly valued.  Highly valued markets absolutely need on-going economic growth in order for companies to have an economic backdrop whereby they can grow their sales and profits consistently.  At the end of the day, profit growth is the lifeblood of increasing stock prices.

When collective market participants look out into the near-future and suspect economic growth may be waning, or worse, challenged to the point of going into recession, they begin to increase selling which leaves lower prices and higher volatility in its wake.  This was the hallmark of the last few months of 2018.

There is an adage in the analytical community that states the stock market has seen 7 of the last 3 recessions in advance.  The point is, at times, market participants see an economic backdrop coming that doesn’t exist and with this collectively overreact with their downside selling pressure of stocks in anticipation of an impending imaginary recession.

The crucial question in times like what we have experienced in latter 2018 is will their forward economic concerns be proven correct this time?

If they are then more downside stock prices will be coming as 2019 unfolds.  If they are not and the economy holds up nicely then notable “out-of-nowhere” rallies will occur such as we have experienced in the past couple of weeks.


The above five year chart reflects the year-over-year growth rate of the important loan category known as Commercial & Industrial Loans.  These are loans taken out by businesses and corporations to fund anything from general business expansion to extensive capital investments.  Historically, they play a notable role in underlying economic activity.

The growth rate of C&I loans were trending down to the point of reflecting near 0% growth in recent years.  Per the red arrow we can see this category is now posting solid growth.  With this past Friday’s update we can see the growth rate is actually accelerating.

This growth rate bodes well for on-going economic growth but like every indicator it is not infallible.  Dating back to 1950, imminent recessions have proved to be far more certain when C&I loan growth rates were trending down or already negative.  Currently, this indicator is one of many that offer imminent recession is unlikely.

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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