Spring 2018 Quarterly Commentary

spring tulips in bloom

As an active money manager, we look for opportunities when others are fearful. LaFleur & Godfrey views the volatility exhibited by the market the last few months, after years of virtually no volatility, as a blessing and not a curse. Because the markets are trading more ‘normal’ based on fundamentals (profits) and with less correlation, we are beginning to see many more opportunities to invest in great growth companies at very reasonable valuations.

While the market bears have had the upper hand so far this year, we are constructive on equities and see the potential for solid equity returns for the remainder of the year if we get confirmation that equity fundamentals are on the rise. However, at the present time, we believe it is prudent to be a bit cautious as we await more clarity or resolution of some of the global trade and headline risks.

Economic Positives

The lending barometer is alive and well! Small Business Administration loans, a very good barometer of the overall health of our economy, are up at an impressive pace. This year loans have advanced 4 percent – well ahead of last year’s pace.

The labor market continues its ascent. The past twelve months, U.S. non-farm payrolls have grown at a +125,000 per month clip. While these results are adequate, the labor market has begun to heat up. Payroll growth has risen at a +202,000 per month average over the last three months. Very encouraging!

Don’t believe the mixed housing headlines! Housing demand remains strong as millennials move out to the suburbs in search of ‘starter homes’ and many homeowners move ‘up market’. The lumpiness in the housing data is more of a supply issue than anything. Low interest rates remain a tailwind for housing.

Economic Negatives

Is a global trade war on the horizon? Negative NAFTA & China trade headlines have weighed on the markets and increased volatility. The long-term impact to our economy is unknown. However, we believe these public negotiations could result in trade agreements less troublesome than current expectations.

Are global economies taking a breather? Recent economic data suggest that any global economic advance will not be linear in nature. The global data in the Citigroup Economic Surprise Index fell below zero last month for the first time since August 2017. This raised a yellow flag for many Wall Street.

Rising rates can negatively impact our overly-levered economy! The U.S. has $21 trillion in public (government) debt, $15T in mortgage debt, $9T in corporate debt and $4T in consumer debt. Quite eye-opening, indeed! We need low rates for longer in order to grow (hopefully) out of our debt.

Market Negatives

Welcome Back, Volatility! A very strong January, followed by a weak February and choppy March has resulted in a whip-saw market which has unnerved many investors. In percentage terms, these day-to-day fluctuations can be considered ‘normal’. We caution our clients to focus on percentage moves, not absolute.

The Fed must be careful. Given the growing concern over the sustainability of our almost decade-long economic advance, we urge the Fed to take a prudent and patient approach to raising short-term rates. Wall Street currently estimates 3-4 total rate hikes this year. We would prefer less, not more.

Geopolitical and headline risk keep many investors on the sidelines! Federal investigations, the conflict in Syria and trade negotiations have kept many risk-averse investors out of the market. These risks are unlikely to go away anytime soon. As a result, a choppy, range-bound market should be expected near-term.

Market Positives

Fundamentals to the rescue! Corporate profits, benefitting from lower tax rates, are expected to post dramatic growth during the first quarter of 2018. Consensus estimates suggest 17 percent earnings growth year-over-year while 2018 full year estimates may rise 21 percent! This is supportive to equities.

Valuations are no longer ‘extended’. As a result of earnings fundamentals catching up to price, a case could be made that equity valuations are attractive once again. The market’s Forward P/E multiple currently stands at 16.5 – only marginally above its 5-year average multiple of 16.1.

A Goldilocks environment for corporate CFOs. Chief Financial Officers, flush with cash from foreign repatriation & stronger profits, are in an enviable capital allocation position. This flexibility should lead to less debt, increased dividends, additional share buy-backs and more M&A / growth investments.