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October 26, 2017 | Market Commentary
With the U.S. stock market reaching new highs, uncertainty surrounding policy implementation, and a series of natural disasters, we’ve recently received a number of questions on potential impacts to the economy and investors. In the below Q&A we answer your most frequently asked questions on these topics.
U.S. equities have certainly had a tremendous run since bottoming in 2009. We’re now in the ninth year of a bull market, with domestic stocks up over 350%, amounting to a generous 19% annualized return.
As markets continue to run, we are watching for warning signs that suggest the end of the bull market is near. However, we currently see few extremes that indicate a recession and/or bear market is imminent. In fact, a synchronized global recovery appears to be unfolding, and strong earnings growth has underpinned recent market performance not only in the U.S., but across all major global regions.
Despite these positive developments, several key indicators suggest the U.S. economy is moving later in the business cycle. Valuations are elevated, labor markets continue to tighten, and monetary policy is inflecting to less accommodative conditions. In addition to these later-cycle indicators, volatility measures remain near historic lows as elevated levels of investor complacency encourage a false sense of security.
While we continue to believe that there are further upside scenarios to the current bull market, several indicators and other risk factors suggest that the U.S. economy continues to move later in the cycle, and that vigilance and selectivity remains appropriate.
While domestic equity markets raced ahead on expectations for infrastructure spending, tax reform, and repatriation, it’s actually very difficult for Congress to get all of these things done while coping with partisan gridlock and a very slim Republican majority in the Senate.
Amid the policy uncertainty, however, President Trump has made progress on issues under his executive branch control, particularly regarding a consistent rollback of burdensome red tape. The Trump administration has worked to lift regulations that already exist, while also showing a reluctance to add new regulations or laws. We believe these pro-business efforts are having an impact, even if marginal, on the spirit of business, while small business owners and CEOs wait for major legislation.
From an investment perspective, we remain focused on long-term fundamental drivers. In the example of tax reform, the reality is that an incrementally higher tax rate is unlikely to detract from an otherwise stellar investment opportunity, just as a lower tax rate is unlikely to turn an unattractive opportunity into a compelling one.
Although these political scenarios are factors to consider when analyzing companies or industries, ultimately, we concentrate on fundamentals, making sure that each company we invest in is a strong fit to our stock selection strategies, and that its valuation assures that our clients are being sufficiently compensated for any risk taken.
History has shown that while there may be near term disruptions from these types of events, over the long run, what really matters is the state of the business cycle. Our Quantitative Strategies Group recently completed an analysis on what has historically occurred in domestic equity markets following natural disasters by evaluating market returns after the ten most costly U.S. hurricanes over the past forty years.
Looking at short- to intermediate-term returns over the subsequent one, three, and six months, what we see is that none of the hurricanes had a visible impact on the market, with the only notable exception, Hurricane Ike, having occurred during the depths of the global financial crisis. Most other events were followed by no meaningful negative returns.
The same appears to be the case for major geopolitical events. Deutsche Bank recently studied the impact of 28 major political events dating back to 1939 to analyze how well and how quickly markets were able to recover. Aside from World War II, it was difficult to identify any consistent pattern where geopolitical events led to a sustained downturn.
While these events often have the potential for near term disruption, any weakness is typically transitory. Over the long run, it is the business fundamentals that matter, and that remains our focus when making investment decisions for our clients.
Perspective on what's trending in the markets and how it impacts investors
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