Marching Higher

Jan 21, 2018 | Cushing Wealth Management


Share

Supportive, global economic data has continued to roll in through January – this past week it took the form of better than expected Q4 Chinese GDP growth. Unsurprisingly then, equity markets continued their march higher, with the same sectors...

Supportive, global economic data has continued to roll in through January – this past week it took the form of better than expected Q4 Chinese GDP growth. Unsurprisingly then, equity markets continued their march higher, with the same sectors continuing to outperform. 


I view stock market gains are being justified by earnings gains. That continues to be true: US tax cuts are now meaningfully lifting corporate earnings, both directly and indirectly. It is notable, however, that the pace of equity market gains has recently started to accelerate. Historically, acceleration of gains (rather than the actual quantity of gains) has been the best signal of equity prices disconnecting from business fundamentals. 


Such disconnects can of course become very large, and the current environment has the hallmarks of facilitating exactly that. But market corrections also occur during these disconnects, and we could reasonably expect to see one of those occur any time now. There presently is no obvious catalyst for a correction, and even if there was, the opportunity cost of trying to time them is generally too high. It is important, then, to simply note that the potential exists so that if a correction occurs, it becomes a time to look for outsized opportunities rather than a moment of concern.


Looking forward, NAFTA negations resume this week. Economists increasingly predict that the Agreement will be terminated, which would cause a material weakening of the C$. The Bank of Canada referenced the risk to NAFTA numerous time this week as well, although it nevertheless raised interest rates to 1.25%. The issue may come to a head shortly, particularly with the State of the Union address on January 30th. 
Finally, the US federal government shutdown that started this weekend is worth addressing: it is the 18th such event since 1980, and is generally limited in its real-world impact. The duration is typically short, and its drag on US GDP growth is a modest 0.1% per week.