For many of us, myself included, the desire to become a sophisticated and successful investor quickly leads into the world of economics and geopolitics. As we learn more about the world around us, it becomes evident just how many dangers lurk around each corner, threatening to shock the global economy and extinguish massive amounts of wealth.
In some cases, the naïve investor who doesn't pay attention to any of this is actually better off than those of us who do. That's because the more you learn about the precarious state of global economies, the more reluctant you become to invest.
Article Category: Inflation
Equity prices around the world have been hitting new highs recently, as the global bull market continues to push higher. But considering that stock prices track economic fundamentals over the long-run, and global economic growth remains modest at best, how much higher are prices likely to go?
Those who have had the benefit of studying markets for some time know that asset prices tend to be volatile in the short-term, as they are driven primarily by investor psychology. But take a step back, and it becomes evident that over the long run asset prices are heavily constrained by economic growth ... if the whole pie doesn't grow larger, then companies are really just fighting each other for market share.
The Fed raised its key benchmark rate by a quarter point last Wednesday, and both the stock and bond markets took it in stride. This is largely because expectations for a rate hike were at nearly 100%, making it "business as usual" for this stage of an economic expansion.
But a slew of data suggests that perhaps the Fed should show a bit more restraint in future meetings, as it may begin compromising its ability to meet its own objectives. The main concern, as you might expect, has to do with inflation.
Leadership is an important consideration in any type of market, bull or bear. When market leadership is thin, and quickly changes direction, it can signal a shift in the tone of the overall market.
The rally that has unfolded in recent months has been changing in character. Originally, the thrust began as a reflation trade, as signs of disinflation/deflation began to fade and global bond yields crept higher. The timing of this coincided with the election, which brought with it hopes of tax cuts, deregulation and infrastructure spending. This boosted the prospects (and share prices) of cyclical companies - those that need an improving economy to do well.
As is often the case, two major areas of interest are sending mixed signals with regard to where the equity market heads next. Corporate profits (as well as revenues) are suggesting more gains lay ahead, while the bond market, in all its infinite wisdom, is pointing towards a slower growth environment.
Which one will ultimately be correct? Let's find out, beginning with corporate earnings.
It's no secret that major corporations posted strong results in Q1. With 99% of the S&P 500 having reported, the blended earnings growth rate for the first quarter stands at 14.0% (FactSet). This is the strongest earnings growth we've seen since Q3 2011, when profits rose by 16.7%.