Equity Markets Delink From Economic Data And Get Distracted With Washington Policy.
Equity markets in America suffered their worst quarter in over two years as 2018 began on a soft note. The softness in equities in Q1 followed an outstanding year for equities in 2017 and was not surprising for many investors but was unwelcome for traders. The S&P 500 fell .76% in the first quarter of 2018. Mitchell Anthony Capital Management (MACM)’s clients enjoyed much better performance in Q1 with almost all strategies posting positive returns. MACM’s diversified equity portfolio advanced 4.8% , DYNAMIC GROWTH advanced 3.5% HIGHLY FOCUSED EQUITIES advanced 5.4%, ASSET ALLOCATION INCOME advanced 3%, and GROWTH advanced 4% in the quarter. MACM’s clients enjoyed 372 – 620 basis points of positive alpha in Q1 of 2018. This outperformance was attributed to the superior group of equity holdings in the portfolios managed by M ACM. Positive alpha was gained from holdings in healthcare, Internet retailing, technology, and financials. Conversely MACM had only modest holdings in areas like telecom, energy, utilities, and consumer staples (which led the equity market lower).
Generally, Washington policy has little impact on the immediate direction of the economy and the Markets. However, markets can be emotionally moved over the short term. The President’s biggest hammer involves his ability to affect consumer confidence and hence drive the direction of consumption. Today consumer confidence is sitting near an all-time high in American history even though America is in the midst of what seems like a revolution as the sharply divided Congress clashes. Confidence is likely improving given the fact that ISIS is being obliterated, and our borders are being hardened. A few years ago consumer’s explanation for low confidence was heavily tied to the threat of terrorism and a weak economy. These two problems have shown modest improvement, and this would seem to explain the all-time high in consumer confidence despite the fallout from the political battle waged on Facebook and Twitter.
The Trump administration is attempting to remake the structure of American politics with unrelenting attacks on the corruption in the Congress. It would seem that his goal is to return America to the capitalistic path it was on in the 80’s under President Reagan. Under Obama and the leadership of liberal Democrats running states like California and New York, America has lost much of its capitalistic foundation, and socialism, if not communistic policies, have been pushed by these leaders. Today’s far left liberals seem to believe that the world should have total financial equality and billionaires should cease to exist. Apparently they want state owned enterprises, and compensation which has little correlation to work ethic. Historically liberal thinking has been good for America and has driven innovation and put the best people at the forefront of our economy. However the new far left does not appear to be focused on innovation or ensuring that hardworking individuals have opportunities as in the past. Significant evidence is now emerging of the quiet deceptive socialistic changes to American policies by the Obama administration. Obviously the Trump revolutionaries seek to change this type of thinking and revolutionize the policies of Obama. As a result, the Congress, the FBI , and the Department of Justice, are now under attack and the legislation for a significant cleanup from the Obama era policies appear to be on the horizon.
President Trump is attempting to execute what America elected him to do and seems relentless as he pursues these promises. The Democrats are also unrelenting and continue to obstruct Trump’s objectives with fake news and have joined hands with the liberal media to counter the perspectives offered by the Trump administration on the problems with the path that America has been on for the last decade or more.
Putting politics aside, we note that the better economic data has given the Federal Reserve the strength needed to raise short-term interest rates and talk optimistically about deleveraging their extensive balance sheet and begin sales of their long-term treasury portfolio. Investors have braced for this, and as a result, the fixed income markets lost considerable ground over the last three months. However, the selloff in fixed income markets has paused recently as trading capital left equities after uncomfortable Washington policy on trade emerged.
Looking away from the distraction of Washington policy we find that the real drivers of the US economy and financial markets have turned upward as positive economic data now is accelerating.
Consumption trends are building across the board. There are notable positive trends from the US consumer, US corporate purchasing managers, and global consumers. US Consumption is supported by the rising wealth of US consumers, and likewise tax cuts for US corporations has brought increased confidence for corporate purchasing managers. The US Economy looks the best we have seen since this recovery began in 2010 and it is exciting to see this emerge after 10 years of difficult times for America. Housing data is still good but leveling out and notably there is not any exuberance worth talking about in housing. Mortgage delinquencies are still close to all-time lows. Debt as a percent of disposable income continues to fall and consumer confidence is close to all-time highs with unemployment near all-time lows. The industrial sector is strong and output is the best ever. The purchasing manager’s survey shows optimism at US corporations.
The outlook for corporate earnings is the best it has been in several years. Sell side analysts are expecting 25% earnings growth for S&P 500 companies this year. First-quarter earnings reports begin next week. Generally investors are not yet believing that the numbers analyst are forecasting are achievable, setting low expectations. If analyst earnings numbers are close to right this equity rally could get back on track again as the widely misunderstood problems with Facebook and data firms move to the back burner.
It would seem that the equity markets will move higher this year after the media’s over-cooked problems with trade and data management subside.
We remain optimistic.