Hi, folks: the first quarter started fast, and soon turned into a bumpy ride. Volatility, long absent, has returned and shown itself in both positive and negative short-term moves. We started the New Year with a stock market that was fully priced by most measures. I believe that the threat of imposing tariffs on imports from some of our most important trading partners could have been the catalyst that triggered the first large (700-point decline). Wednesday morning, once again there was deep concern due to China’s vigorous response to the Oval Office’s tough talk and threats on trade. As we watched, the market swiftly registered a 500-point decline. As we approached the closing bell, fears of a disastrous stance on trade have succumbed to the belief that the President’s position on tax and tariff’s is once again, just a negotiating tactic to improve our economic position in all of our existing trading treaties.
Some buying came in late in the afternoon, adding 250+ points back to the averages. Another way of looking at this is that the market rallied some 750 points from Wednesday morning's low point. All of the market's turbulence cannot be blamed on The Whitehouse however.
At this point in time, there seems to a confluence of unrelated negative financial stories that are challenging the stock price of the company, issuing the negative news. The obvious example is Facebook and the enormous private data breach of millions of their users. The number of records breach has been revised upward several times and I am sure will be on center stage as Mark Zuckerberg, Facebook’s founder testifies before Congress on April 11. There is also the belief that Cambridge Analytical, a data firm with ties to the Trump Campaign had private data on 87 million Facebook users. Facebook has admitted that they improperly shared private data on 87million Facebook users.
My take on this is that the premium that has been attributed to the stock valuations and founders of the new technology companies will be severely challenged in the Marketplace. The F.A.N.G. stocks as they are called, Facebook, Amazon, Netflix and Google which have been the “could do no wrong group“ could be caught up in a tech stock selling contagion in the short term.
Now back to the basics that make our economy a great place to invest. At the end of the first quarter in 2017 our economy was growing at a 2.6%; this year for the same period, the growth rate came in at 2.9%. According to JP Morgan’s economist, Dr. David Kelly, we can expect 3 or 4 more quarters at that growth rate and reach 3% sometime in early 2019. This very strong performance and forecast has been achieved in a very low interest rate environment with a new tax package, encouraging both individual and corporate spending.
The Federal Reserve historically likes to use their tools to help the economy grow and maintain 2 % inflation rate. The New Federal Reserve Chair has expressed his intentions to raise interest rates to head off any asset bubbles forming as a result of rapid growth. It is likely that three additional rate hikes could push long term rates above 3% in mid-2019. Unemployment is expected to drop to the mid 3% range. At that point our growth will start slowing, as we will be out of labor. This should force some positive change in our long outdated immigration policy
The investment environment should continue to be positive for the next 4 quarters in the US. Europe will probably offer a slightly better investment environment because they continue to have excess labor capacity and maintain satisfactory trade relations. “Ready, Fire, Aim” was the name I gave the senior management of a poorly run company I analyzed for a project in my Junior Year of College.