A Time to Cheer
By Don Schreiber, Jr. - WBI Founder and CEO
(Printable PDF available below)
2018 Q1 TO BREAK 10-YEAR ANEMIC Q1 GROWTH TREND
We will get the first release of 2018 Q1 GDP this Friday, and I have already seen headlines indicating the U.S. economy is expected to post a disappointing 2.0% growth rate.1 I say: don’t worry, be happy. While this rate of growth is slower than the 3.0% rate the economy averaged for the prior three quarters, it is far better than the 1.4% post for Q1 2017.2 Instead of being disappointed we think you should take heart because first-quarter growth over the past few years has been more anemic than current expectations, averaging just about 1.0%.
Consumer spending in the fourth quarter was particularly robust and caused consumption to weaken as it does typically in January and February. The pickup in retail sales in March turned the consumption trend positive, and the economy seems to be running hotter than Q1’s GDP post is likely to suggest. A first quarter print in the 2.0% range should help set the U.S. up for the first 3.0% GDP print in more than ten years. And while economists expect GDP to increase to 3% plus growth in 2018, buoyed by tax cuts and infrastructure spending, we think real results may be a bit higher. With recent tax cuts putting more money in consumers pockets, spending — which accounts for roughly 70% of GDP — may be surprisingly robust.
Consumer optimism has waned in the face of geopolitical concerns and Fed tightening which is weighing on the markets. Clearly, the blockbuster first-quarter earnings reports support the consensus opinion that the economy is strengthening. It’s hard for me to believe investors are now looking for reasons to sell rather than buy stocks. Consumer sentiment and herd behavior which previously pushed markets higher in the face of negative corporate growth trends in 2015 and 2016 seems to have undergone a cataclysmic shift recently — perverse and also one hard to fathom.
While it is early in the reporting season with only 17% of S&P 500 companies reporting, year-over-year growth rate in earnings is 18.3% so far according to Factset (4/20/18). The small and mid-sized companies in the Russell 2000 index show a growth rate of more than 30%. A good portion of the growth in earnings can be attributed to the drop from 2017’s 35% top corporate rate to 2018’s 21% top corporate rate. Earnings are strong for U.S. companies, even if you back out beneficial tax adjustments.
Instead of discounting the positive trends in GDP and corporate earnings investors should be cheering the positive trend by driving stock prices higher. We credit the change in behavior to a shift in investor consensus opinion moving from overly optimistic to guardedly optimistic. Our expectation is investors will get back in the game as trade policy concerns abate with the announcements of trade deals over the next few months. Arguably the most important factor for the bull market trend to reassert itself will be Federal Reserve interest rate policy. If the Fed sticks with the current plan to raise rates possibly two more times this year, we could see the markets move dramatically higher as investors come to appreciate the U.S. economy’s shift into a higher gear and the continued outperformance for company fundamentals.
We believe investor behavioral bias is more prevalent today than ever before in setting the course for markets. The crowded trade into passive index products and the sharp rise in markets over the past five years after markets achieved all-time highs in 2013 confirms this bias. The emotional, behavioral bias we have seen play out make the markets much more difficult to handicap because investors seem to “zag” when logic based on fundamental data would suggest they should be “zigging”. The fundamentals suggest the market has tremendous support to move higher, but we will have to wait and see if investor behavior “zigs” with the fundamentals or “zags” to increased pessimism.
Finding a money manager like WBI who has a disciplined process designed to protect your capital for large losses as their first priority and to capture a dependable return from dividends while you wait for gains to materialize is crucial. WBI’s process is designed to help investors minimize losses during bear markets and maximize return in bull markets.
1 Frbatlanta.org. 17 Apr. 2018.
2 "News Release: Gross Domestic Product." Bea.gov. n.d. Web. 24 Apr. 2018.
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