March 7, 2018
Summary: As forecast in my 2018 Outlook, markets have seen a return to “normal” this year with increased volatility and an expected correction in the stock market. Despite the recent correction and volatility, this does not signal the end of the bull market which will likely continue for another year, or two. International markets, many still in earlier stages of the economic cycle, continue to look like a bright spot for continued growth. But with the economy now in its mature stage and inflation and other factors now at play, we cannot rule out a recession coming sooner than we expect.
The Good: While concerns are always highlighted in the media, the underlying economy still looks fine. Approx. 85% of the economists in the Wall Street Journal’s latest survey expect the economy to continue growing in the near term. And The Conference Board’s Leading Economic Index® for the U.S. increased again this past month. “The U.S. LEI accelerated further in January and continues to point to robust economic growth in the first half of 2018. While the recent stock market volatility will not be reflected in the U.S. LEI until next month, consumers’ and business’ outlook on the economy had been improving for several months and should not be greatly impacted,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The leading indicators reflect an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets.”
The Bad: U.S. markets do, however, continue to be slightly elevated. So, a further correction is not out of the question and would not surprise me. And for the underlying economy, there is a growing concern about higher inflation and rising interest rates, which we are beginning to kick in. This should be watched closely. It has been and will continue to be a headwind for bonds. But it should not be a major concern for stocks until it reaches considerably higher levels. More recently, Trumps’ talk of tougher tariffs (accidental alliteration appreciated) has been the concern that has sparked the past week’s volatility. We noted a year ago in our 2017 outlook that a trade war would not be good for stocks. I’ve been optimistic that Trump’s advisors would caution him against sweeping tariffs that could start a trade war – and that he will tread carefully. Today’s (3/7) resignation of National Economic Council Director Gary Cohn, does not build confidence in this optimism.
Normal market volatility should not concern investors who are in diversified portfolios appropriate for their plan and risk tolerance. Rather than reacting to such downturns, it is best to stay the course and wait for markets to come back around and continue ahead. With markets still up over the long term, however, it never hurts to do a more thorough review of your plan and portfolio to make sure you are comfortable with your allocation, even if it is appropriate to your plan. Even if your plan says you are healthy enough to ride a roller coaster, not everyone wants to! If you are concerned about a potential recession, it may be better at this point be slightly more conservative relative to your plan, rather than on the aggressive side.
If you would discuss the article, please contact Greg at 316-440-2550.