Friday, February 2nd will mark Groundhog day. On this day Punxsutawney Phil will emerge from his burrow and look for his shadow. If he sees his shadow, the weather is clear and he will retreat to his den and winter will last for six more weeks. If he does not see his shadow, due to cloudiness, spring will arrive early.
One would assume that seeing your shadow would mean that things are good, the sun is out, time for winter to end. But it is the opposite. Markets often feel like that. Last year there was darkness on the horizon, but spring came early in the form of great returns. Moving into 2018, global earnings continue to show strength, inflation is low and despite the Fed moving short-term rates, interest rates are low. So, it looks pretty sunny out, I hope Phil is wrong.
The unemployment rate is low in the US as well for members of the Organization for Economic Co-operation and Development (OECD). The OECD total unemployment rate in black. Spinnaker, along with the market will be watching for rising wages, to date wage growth has been anemic, at best. Should workers start to demand higher wages, in a tight labor market, we could see inflation pop its head out of the den.
Markets should begin to see how the tax cuts benefit corporations. Recent headlines have been written about companies raising wages, repatriating overseas capital, and expanding US operations. Corporations may also decide to buy back their shares and/or raise dividends. All of these could be positive for stocks in 2018.
Finally, consumer confidence reached levels not seen since 2008. Consumers are two-thirds of the GDP calculation, so a happy consumer creates a happy GDP. The stock market, low unemployment and tax cuts all are contributing to consumer confidence.
They say that bull markets do not die of old age. They generally die from a recession, a bursting bubble, or inflation. The metrics we watch are not currently pointing to a recession, bubble or inflation in the short term. We are watching the largest component of GDP, the consumer. The consumer is so confident that, as of last year, they have racked up over $1 trillion of revolving credit (credit cards). With flat wages, consumption comes from credit. There is a point (in theory) where you can’t spend more; we haven’t hit that yet.
We wish you a Happy Valentine’s Day and we hope that your team wins the Super Bowl. Let’s all hope that Punxsutawney Phil tells us spring will be here soon.