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This Economically Important Loan Category is Decelerating

CAMS Weekly View from the Corner – Week ending 11/15/2019

November 18, 2019

In the previous few years 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.

Noting our consistent mentioning of our highly valued markets without an actual on-going downtrend in markets speaks to how poor of market timing indicator valuation tools can be.  Said differently, markets can be and do remain highly valued for far longer than most would think possible, without incident, volatility notwithstanding.

With this, be careful if you hear someone calling the end of a bull market because the on-going bull market is historically highly priced relative to measures such as the size of the economy or level of earnings from such well known valuation measures as the P/E ratio.

To be aware of the valuation backdrop is absolutely essential so we know the proverbial waters we are swimming in if you will.  Placing valuation analysis high on the market timing list though can prove foolhardy from an opportunity cost perspective as markets can continue moving upward in the face of high valuation levels.

FRED - Commercial and Industrial Loans - 11.18.19

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 first red arrow we can see this category picked up by posting solid growth.  With this past Friday’s update, via the second arrow, we can see the growth rate is now decelerating.

An ebb and flow in the growth rate of this category is not an “economy killer” if you will.  Friday’s update still reflects a sound growth rate of nearly 5% compared to year ago levels.

Under the view of knowing we are operating with highly valued markets and market participants can be quite sensitive to anything weakening economically; we want to be fully aware of the economic nuances.

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 remains sound in its growth rate but we are cognizant of its developing down trending behavior and thought it worthy to share.

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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