Following their all-time high on March 3, US equities continue to drift lower in recent weeks on the perspective that hard economic data is still not yet fully confirming the improvement in soft-data (aka consumer and business sentiment). The S&P500, Dow, and Nasdaq were each more than -1% lower for the Easter holiday-shortened trading week and broadly some -2.8% below their all-time highs set on March 1. While economic data has not broken down nor is it suggesting that the economy is slowing, it is yet to reveal a very noticeable uptick in the pace of activity either. In addition to the weakening sentiment over the growth outlook, there have been too many changes recently for the markets to completely shrug off; most notable recently is the rise in geopolitical risks including the strike on Syria by the US a week ago and another bombing effort targeting ISIS in Afghanistan late last week all while tensions continue to rise between the US and Russia, as well as rising hostility and displays of provocation from North Korea. These events are capturing the focus of investors and upping the uncertainty of what intensifying global conflict may look like on the soft-data.
From an economic fundamentals perspective, the weight of evidence continues to support the view that the US and global economy is doing fine and not at risk of a recession. Unemployment claims, construction equipment dealers, the oil rig count, as well as mortgage applications for purchase, consumer comfort, and global leading indicator index continue to post respectable numbers. At the same time however, traditional US retail (brick & mortar) continues to snatch headlines and paint a picture of slipping demand; it is worth noting that many of the troubled retailers are companies whom which broad swaths of consumers shop regularly and thus carry outsized headline risk. With that said, online retail is it logging growth that more than explains the decline in physical retail locations, so it would appear that consumers are still spending, but shifting their activity online and away from the local stores. Corporate earnings season is also underway for the 1Q period, and looks set to post gains of around +3.3% over last year; this is helping credit spreads remain tight and inflation expectations relatively firm.
Bringing everything together, we sense that a number of investors are growing anxious following what has been a very strong 6 month period. There is also of course the perspective that the current bull market phase is quite aged by historical standards no 8+ years and counting and early-year momentum is slowing. It is no secret that from an absolute level, financial markets and stocks are not inexpensive, an attribute that historically implies below-average forward returns. In agreement, we have highlighted for several months now the potential for a near-term pause or drawdown to occur, especially amid diminishing hope that a non-traditional President might be able to change the level of political dysfunction we have grown accustomed to. But while we would not be one bit surprised to witness a pullback by the markets, especially amid rising geopolitical concerns and a softening growth outlook by investors, the signposts for a more sinister unraveling or end to the current economic expansion are not in place. Historically, rising corporate earnings preclude a recession and bear market occurring in the near term. Additionally, investor sentiment remains all but euphoric, if anything seems more stuck in the skeptical category. From our perspective, this remains a market that is not young, but also lacks an easily identifiable excess that threatens the economic outlook. Historically an expanding economy has minimized the risk of a bear market and/or economic recession. That view is only further reinforced by the majority of economic readings outside the US and most notably China (being the 2nd largest global economy) that are also in an improving trajectory and is like having the wind at your back. Again, we believe the markets may continue to consolidate near-term, but full-year outlook is one that rewards remaining in the game.