Many signs have emerged that may indicate we are in the late innings of our economic recovery and stock market advance in the United States. While the S&P 500 has been resilient, what is happening below the surface doesn’t look healthy. Leadership of the U.S. market has narrowed and the factors and characteristics of companies that have been leading the charge reflect extended valuations. Investors seem to be shunning fundamentals. Traditional and reliable measures of value are not being rewarded.
A small group of technology stocks have been responsible for over 40% of the S&P 500 return in 2017. This kind of divergence is worth paying attention to. This week the tech sector has begun to show weakness. It’s a great time to rebalance investment portfolios and replenish cash reserves.
We have not abolished the economic cycle in the U.S. or around the globe. We have written about the importance of the economy over politics since last year. While the U.S. economy has stayed on track and driven a market advance, recent indicators show a mixed picture that could be forecasting future weakness. Relative value outside of the U.S. has become increasingly attractive. Recessions are as certain as expansions. We have had an extended expansion driven by very low interest rates in the United States. At this stage of the game, it’s hard to know if excess government stimulus will send us to extra innings.
We are global investors and monitor risk. In times like this we pay attention to what the market is telling us and make adjustments.