We are always looking for what will be the next market catalyst that will take your portfolio up. While earnings have been beating expectations, those expectations were so low, this was not surprising. We were looking for earnings to be that catalyst. Over the last 18 months we have seen earnings dip a little. That is why we have seen the markets level off. Last week the markets were positive but that only pushed the markets up 2 points. Over the last month the S&P 500 was up 32 points but that has rolled off. At this point last year the market was 50 points lower. It seems like we are moving very positively but something is hindering that from carrying on.
Can earnings catch up to prices?
Typically, when the market stays flat for this long, earnings catch up and make the market less expensive. That hasn’t been happening because earnings are actually falling (See chart below).
So while the market has had small improvements, it has become more expensive. While we have broken out of market resistance and we have a cooperative Fed, the market fundamentals are not there. It is in the fundamentals that we are looking for the next market catalyst.
The next market catalyst
The next market catalyst could come if earnings catch up to price and make the market less expensive. The big negative risk will be if price drops to where earnings are. If earnings can catch up, that will be the catalyst that pushes the markets to go higher. At this point, earnings do not match prices. We have seen a continuous drop in earnings and that has given us some concern. This drop has come from a drop in productivity.
Technology could be the market catalyst
A McKinsy report has projected that, over the next few years, 47% of the job market will be impacted by technology. Historically, we think of technology replacing human productivity much like a robot on an automobile assembly line that pushes productivity up. Going forward we will be seeing technology and automation moving into the professional/white-collar roles. For example, many law firms are using computers with quick search engines to do their case study building instead of using a traditional staff attorney. It’s possible that this type of technology could be the market catalyst that could push that earnings component up.
The consumer is still very important to all of this but retail sales came out flat last week. The past 3 months we have seen an upswing in retail sales so we need that to pick back up.
A Brexit surprise
Everyone thought that the British exit from the European Union would hurt retail sales in Europe. Last month, however, European retail sales were up 2%. Perhaps the European fears were overdone.
We’d like to know what your questions and concerns are. Send us your comments and feedback.
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Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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