Each December most of us feel the hustle and bustle of shopping, visiting friends, participating in family and work parties, and reflecting on the good and bad of the year. While the economy continues to move forward and upward, our stock markets continue to shift and shake. What is causing this roller coaster ride over these past few months?
On December 3rd, GM announced they are laying off up to 15,000 workers and closing two U.S. based factories in Ohio and Detroit. While Ohio Senators have begun taking steps to meet with GM and find another solution, the employees enter the holidays with trepidation and uncertainty about their future. The GM announcement is among a string of companies in 2018 that blamed the Tax Cuts and Jobs Act, or the Trade Wars, for their need to lay off employees this year. Furthermore, the technology industry continues to reel from its October decline for reasons, including security breaches, regulatory concerns, and ongoing legal investigations. Oil and energy fluctuations carry on, creating fear and uncertainty.
Are these signs of a waning economy? Or is this merely more political positioning and corporate positioning? Perhaps, 2018 is a perfect storm of fundamental shifts in how companies do business, a politically charged environment, and a historically long bull run in the markets that are producing low investor sentiment.
Let’s pull back the curtain to look at the fundamentals.
Consumer spending is expected to be strong this holiday season.
The unemployment rate continues to remain historically low which means more families have wages to spend during the holiday. Matthew Shay, National Retail Federations’ President, and CEO said, “Thanks to a healthy economy and strong consumer confidence, we believe that this holiday season will continue to reflect the growth we’ve seen over the past year. While there is concern about the impacts of an escalating trade war, we are optimistic that the pace of economic activity will continue to increase through the end of the year.”
Corporate earnings growth rates will likely decelerate from 20+% in 2018 to around 9% next year. So, while the stock market lifted nicely last year anticipating super-heated earnings growth, the expected down-shift in 2019 is negatively affecting stocks today. This is all part of the market’s natural process of discounting future expectations. However, it doesn’t spell the end of the economic cycle. It just means that stock valuations need to come down. The chart below shows how far stock valuations (as measured by P/E ratio) have fallen from their January highs.
S&P 500 Index aggregate earnings-per-share by year:
2018: $163 (22% annual growth)
2019 forecast: $179 (10% annual growth)
U.S. Household debt continues to be low in comparison to disposable income. As you can see in the chart, a significant reduction of debt occurred during the 2009 recession and today is continuing to hover under 10%.
All-in-all, the fundamentals look good. This truth leads us to have confidence in the long-view even though fear and politics are warping short-term clarity. Additionally, the shift in how businesses drive profits and staff future needs is also creating apprehension. However, with low unemployment rates, there are many choices for job seekers to transition well, and potentially at higher wages. Keep weeding through the noise and emotion this holiday season to drive good decisions for your financial situation.
If you would like to keep up-to-date about our interpretation of the markets, then you can check out our daily market update provided by Mike Verity, CFA, CIO, Owner at Lighthouse Financial Services, Inc.
Looking for an advisor who can help you manage your assets during this market season? Contact us, to set an appointment with one of our experienced advisors.
Jones, Charisse, (Oct. 3, 2018). Shoppers expected to give retailers a holly, jolly holiday season as they buy a bit more. https://www.usatoday.com/story/money/2018/10/03/shoppers-expected-spend-more-holiday-season-retailers-say/1510670002/ pulled 12/7/2018.
Shepardson, D. 12.3.2018. Update-2 Senators, union pressGM CEO on plan closings, job cuts. https://www.cnbc.com/2018/12/03/reuters-america-update-2-senators-union-press-gm-ceo-on-plant-closings-job-cuts.html.
SmallJoys.com. 12.3.2018. Heartbreaking Pictures of Workers Sobbing After GM Announced 14,000 Job Layoffs. Bring podium as needed. https://www.smalljoys.tv/pictures-workers-sobbing-gm-job-layoffs/.
The Telegraph. Tech stocks suffering worst month in a decade. https://www.telegraph.co.uk/technology/2018/10/26/tech-stocks-suffering-worst-month-decade/.
Verity, M. Nov 2018. LFS Chartpack Powerpoint Presentation. Lighthouse Financial, all rights reserved.