Market Pulse: a conundrum for investors
June 8, 2017
The market averages reached new highs as investors continue to expect the business-friendly Trump agenda will lead to an acceleration in gross domestic product (GDP) growth. Or will it?
Looking beneath the surface, Wall Street isn't so sure. If the economy is sure to accelerate, the 10-year Treasury wouldn't yield a paltry 2.16 percent, utilities wouldn't be at all-time highs, and financial stocks wouldn't have given back their recent gains. What's an investor to make of it all?
The economy may turn strong, but there aren't signs of that yet. Last week, the Labor Department reported only 138,000 new jobs in May. Worse yet, March and April were revised down by 66,000.
The unemployment rate fell, but that was due mostly to people leaving the workforce. The initial spin was that employers were finding it harder to find employees. That's not likely as wages were mostly flat. Wages would be rising if the goal were to coax people back to the workforce.
It's also important to note that most stocks aren't as strong as the major market averages. A small number of big-cap technology stocks (Apple, Facebook, Google, Microsoft, Amazon, etc.), all institutional favorites, have been the drivers. Technology has the highest sector weighting in the S&P 500 (20 percent).
This much we do know. Corporate tax cuts will lead to an increase in profits, which will boost stock prices. The market's rally since Election Day reflects that hope. If tax cuts are in jeopardy or even delayed more than expected, enthusiasm could and should wane. There is no sign of that, yet.
If the optimists are right, GDP growth will accelerate, profits will rise, and that will be good news for the stock market. Interest rates would rise, helping the financial stocks, but not others with higher yields. For most investors, times would be good.
If today's buyers of utilities, bonds and better-yielding stocks are right that GDP growth won't accelerate, then we'll continue to have sub-two-percent growth as we've had for a decade and the Federal Reserve will slow walk rate increases. Stocks have done very well with sub-two percent growth and low rates. Investors would continue to do well.
Many investors are seeing a win-win situation. One needn't be entirely in one camp or the other. Investors should have some growth-oriented stocks if the optimists are right and some more defensive issues if they're not. We have, and we will. So far, so good.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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