The February employment report crushed expectations for the number of jobs created (313,000 versus the consensus expectation of 205,000), but wage growth moderated from the surprising January levels. January’s numbers were also revised higher from 196,000 to 238,000, and the total two-month revision increased by 54,000. The headline number was the strongest result since July 2016, and points toward continued economic growth in the United States.
Our favorite leading indicators are signaling that further economic growth and stock market gains lie ahead. With the bull market celebrating its ninth birthday on March 9, we looked at some of our preferred leading economic and bull market indicators. We included LPL Research’s proprietary “Over Index” and two of the Five Forecasters (the Conference Board’s Leading Economic Index and stock market breadth), in an effort to help assess the likelihood that the bull market will reach its tenth birthday in a year.
High yield has faced some headwinds thus far in 2018, but fundamentals remain solid. Additionally, weakness has mostly been equity-market driven, and generally not tied to specific concerns around credit. Worries over a more aggressive Federal Reserve (Fed), increased deficit spending, and thus, higher interest rates could negatively affect fixed income investments broadly, including high yield. Spreads have widened, and subsequently recovered, in sympathy with equities thus far in 2018. Figure 1 shows the extent to which equities and high-yield spreads can move in tandem.
Economic reports released in February 2018, largely reflecting economic activity in January, signaled continued steady growth though mixed with rising inflation. While a number of the reports missed consensus expectations, softening data were mostly attributable to givebacks following strong data in late 2017. Overall, the data painted an optimistic picture for the U.S. economy in the first quarter of 2018. The Bloomberg-surveyed consensus estimate for fourth quarter gross domestic product (GDP) growth was revised slightly downward from 2.6%, leaving growth for the year unchanged at 2.5%.
The Portfolio Compass provides a snapshot of LPL Financial Research’s views on equity, equity sectors, fixed income, and alternative asset classes. This monthly publication illustrates our current views and will change as needed over a 3- to 12-month time horizon. Read recent issue...
OVER THE PAST EIGHT YEARS, extraordinarily accommodative monetary policy has served as the primary catalyst for spurring continued economic growth in the U.S. and around the globe. Although the economic expansion has delivered steady gross domestic product (GDP) growth, consistent returns for the broad stock market, and an improving job market, the expansion itself has been lackluster.
An important shift has taken place in this economic cycle. The Federal Reserve (Fed) was finally able to start following through on its projected rate hike path, raising rates twice in just over a three-month period. By doing so, the Fed showed increasing trust that the economy has largely met its dual mandate of 2% inflation and full employment, that the economy is progressively able to stand on its own two feet, and that fiscal policy may now provide the backstop to the economy that monetary policy has provided throughout the expansion.
Stock markets, bond markets, the economy, policy — some years they push and pull on each other lightly as markets follow their own path; in others, one influence, such as monetary policy, dominates. But sometimes, often following a period of change, understanding the pushes and pulls and how they interact becomes a key to reassessing market dynamics for the next year and beyond.
During any presidential election, you can expect a barrage of promises from the yard sign endorsements, bumper stickers, stump speeches, and media headlines. All pledge to improve the economy, provide better education for all, and preserve the environment.
The Economic Cycle - We believe we are in the mid-to-late stage of the current expansion, but we are still seeing some early cycle and late cycle behavior. Extended loose monetary policy, inflation, and employment growth are still exhibiting early cycle behavior, while some items relating to corporate profits are showing late cycle behavior, although they may be reset if profits improve.