In late September of last year, fears of a recession and widely predicted declines in corporate profits dominated the financial press. As could be expected, investor sentiment soon followed suit and U.S. stocks went into steep declines.
A review of chart data, available on MSN.com, shows the widely followed S&P 500 index bottoming out on Christmas Eve, nearly 20% below its previous high on Sept. 20, 2018.
At the time in September, emboldened by the strong economic growth of the prior 20 months, the Federal Reserve was signaling its intention to continue raising short term interest rates into 2019. This intention was reinforced by the Fed with an increase in interest rates following its September meeting and a fourth 2018 rate hike at the central bank’s December meeting.
Then everything changed.
With the stock market in steep decline, recession concerns seemed to take root at the Fed as well. After the December rate increase, the Fed adopted a “wait and see” approach.
Investors appeared to be soothed. The S&P 500 index bottomed two trading days after the Fed announced its change in disposition, and charts show a very clear upward trend since.
So, what happened to the recession? What happened to the drought in profits?
Well, five months later, my Google search of “2019 recession” reveals quite a bit more recent columns by the “experts” pronouncing “no recession” than pundits still holding onto their gloomy predictions from last year. And as far as the “earnings recession” that was also all the rage last year, a review of recent earnings announcement by FactSet shows something interesting.
About a third of companies in the S&P 500 have reported first quarter earnings, and earnings do appear to be down slightly on a year over year basis from last year. The interesting part however, is that the FactSet analysis also shows that sales (i.e. revenues) are actually up over 5% for the same timeframe.
Considering this healthy dichotomy logically, the anecdotal reason, I surmise, is that input costs, mostly in the area of rising wages, have eroded profit margins, and, low-and-behold, this supposition is validated by the FactSet analysis as well.
It would appear that, although admittedly late into the economic cycle, American workers are finally experiencing the wage growth which has been so elusive for the past 10 years, and from this investor’s point of view I think this is a great thing.
Apparently, I am not alone. A review of the same chart on MSN shows the S&P 500 setting new highs on at least two of the last three days (I write on Tuesdays).
In my opinion, from a top-down perspective, things look pretty good right now in America. The government said last Friday the economy grew at a very health 3.2% rate in the first quarter, the stock market is making new highs, unemployment remains at historically low levels, workers are finally enjoying higher wages, companies are experiencing growing sales and the Fed appears to be maintaining a more accommodative, wait and see, stance on interest rates.
Not to be lulled into complacency, Washington is still a mess, Europe and China are struggling with slowing growth, and worldwide debt continues to concern me, but I can’t help but feel that this is a good time to be an investor.
There are certain strategies to employ during mature bull markets. Be vigilant, be active, don’t be afraid to take gains as they are presented and try to enjoy the run.