One question we’re frequently asked is whether or not the equity market has peaked. It’s a logical question, especially since the U.S. economy has experienced 109-consecutive months of expansion (the record is 120). Yet, we hear news about the Trump administration threatening tariffs and economic pundits discussing potential repercussions, which can make you wonder what the future has in store.
At Luma Wealth, we believe the U.S may break its 120-month expansion record. Here’s why:
- The yield curve has not yet inverted. The shape of the yield curve (which reflects bond rates at different maturities) is a widely followed economic indicator. When the curve is inverted, it means short-term bonds are paying a higher rate of return than longer-term bonds, which could signal a lack of investor confidence. Historically, an inverted yield curve has preceded each of the last seven recessions over the past 50 years – however, right now the yield curve is flattening, but is not yet inverted. It can take a very long time before a flat yield curve inverts (between 1994 to 1998, the yield curve remained flat before inverting). Once the curve has inverted, it can take a long time before a recession actually begins.
- The Trucker’s Survey is strong. Trucks and railroads tend to move most of the commerce in the U.S., and if the Trucking Survey is trending up, that’s a good sign. Historically, the Trucking Survey has the highest correlation to the direction of the economy, and right now, it’s near a 15-year high. (Source: Evercore ISI)
- Small business owners remain optimistic. Job openings continue to climb, and an Index of Small Business Optimism is at a record high, suggesting potential trade disruptions may be minimal, and there are no issues with confidence at this time. (Source: Evercore ISI)
- Corporations are spreading the wealth. Dividend payouts went up in the second quarter of 2018, indicating that companies have high cash balances and are looking to provide returns to shareholders. Although some companies have voiced concerns about input costs (especially for steel and aluminum), we have not yet seen demand slow down.
Some asset classes are up, others are down. Remain diversified.
So far this year, the small cap sector has performed well while international equities (which had a banner year in 2017) have performed poorly. Although market conditions may cause us to shift portfolio weightings relative to our benchmarks, we continue to believe clients should maintain diversified portfolios comprised of a variety of asset classes and invest for the long term.
Good portfolio decisions are always a balancing act. Be in touch with your advisor if you have any questions regarding how these topics may affect your portfolio.