Market Review March 2018

As the first quarter of 2018 came to a close, investors have reason for a great deal of optimism. Indicators of strong corporate earnings carrying over from the end of last year is supporting markets, and GDP growth is continuing to rise and make way for global expansion. While a US trade war looms, giving way for a potential shaky international trade, its potential effects are not yet apparent in the current economic climate.

Market growth supported by strong earnings

While some market experts have claimed the rise in stock prices has created a market bubble, there is clear data that shows price increases are a result of strong earnings from companies across the board, with P/E ratios only slightly rising throughout the beginning of the year, even as prices have risen. In fact, the P/E ratio for the S&P 500 and Nasdaq 100 are both almost exactly at the same level as one year ago, pointing toward growth that is based on strong fundamentals and not market speculation.

Manufacturing sector has room for growth

Even as the market has continued its torrid climb forward, there is still a great deal of potential in the manufacturing industry. February brough the country’s biggest expansion of factories in 13 years, a response to rising demand that current production is having trouble keeping up with. This points to rising potential for domestic production growth, as suppliers attempt to fill backlogged orders and meet consumer demand.

It appears as though US manufacturing has already regained its footing after the fall of the financial markets in 2008, and it is expected that the sector will regain all of the output lost during that time by mid-2019. The Manufacturers Alliance for Productivity and Innovation (MAPI) estimates a growth rate of 2.8% for domestic manufacturing on the backs of increased profitability and consumer demand.

 

Is the US really headed for a trade war?

Significant tariffs on steel and aluminum imports have begged the question if the Donald Trump led White House is steering the United States towards and international trade war. Clearly the Trump administration is doing its best to reduce the trade deficit which has been substantial for the past several decades, although has lessened compared to its lowest points in the mid-2000s.

Experts are mixed on whether the mounting US trade deficit is actually a problem for the economy. If import tariffs are successful they have the potential to strengthen the US dollar against foreign currencies, and in turn, make US treasuries more appealing to investors. With the current trade climate, US companies are importing more goods from overseas sending capital to foreign countries. As a result, the capital sent out generally tends to come back in the form of foreign investment, as the US is seen as a good place to invest capital for foreign firms. This could, however, change in the future if global sentiment on the United States sours and foreign investors begin to take money out of the country.

It is unclear as to the global impact of these increased tariffs, and if/how US trading partners will retaliate with tariffs of their own, or take other action, such as China selling-off its US treasuries, dampening the market.

Oil prices rise

The price of oil continued its rise for the third straight quarter overall, with the price of crude oil settling around $65 per barrel to end March. Analysts are mixed when it comes to predicting the future price outlook of the commodity, citing increasing geopolitical risks and an uncertain supply as factors that could send prices one way or another.

Russia is in discussions with OPEC on an alliance that could last the next 10-20 years past the point of their collective production cut agreement. Saudi crown prince Mohammed bin Salman told Reuters in an interview, “We have agreement on the big picture, but not yet on the detail.”

Facebook data scandal

After it was reported that over 50 million profiles on the social media platform were used by Cambridge Analytica to harvest data and target consumers, the price of its stock took a tumble down to $152, a fall of almost 18%. The company reportedly knew about data breaches since 2015, yet did nothing to keep users up-to-date on the findings. This has led to massive questions about how data is being used by big companies such as Google, Amazon, and Apple, where consumers voluntarily offer personal information to be used by the companies. Facebook, who’s stock rose 53% last year alone, is in danger of losing its stronghold in the social media market.

Consumer sentiment is high

It is clear that the tax cuts of 2017 are paying off in the economy immediately, as consumer sentiment in March was at its highest rate since 2004, continuing its upward trend over the past 5 years. “While consumers view the current level of interest rates as still relatively low, they understand that interest rate hikes are intended to dampen the future pace of economic growth,” noted Richard Curtin, the University of Michigan economist who headed the survey. Other positive news from the pulse of Americans reported 57% of households with financial progress over recent times, and 21% of consumers choosing to make durable goods purchases now in anticipation of higher prices in the future.

 

Positive global economic indicators

The global economy is showing positive signs that should make every investor water at the mouth. GDP growth and low inflation across most of the world is a combination creating an environment of stability while also allowing for continued economic expansion. The World Bank expects global GDP growth to exceed 3% as a result of recoveries in trade and manufacturing across the globe. As inflation remains low for most countries, monetary policy is expected to remain loose and accommodate further growth in the short and medium term.

It is expected that this will be the first year since the horrid financial crisis that the world economy will be operating at, or near, full capacity. Partnerships between the world’s two fastest growing economies, China and India, provide a springboard for global growth, says a representative at the IMF. However, growth is not just being seen in major world economies, as 120 countries around the world have experienced economic growth year-over-year. A note from Jim Yong Kim, the World Bank Group President, stated, “This is a great opportunity to invest in human and physical capital. If policy makers around the world focus on these key investments, they can increase their countries’ productivity, boost workforce participation, and move closer to the goals of ending extreme poverty and boosting shared prosperity.”

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