The TEXPERS Blog

3 Factors Supporting a Strong Market

By Matt Orton, Guest Contributor

The United States is experiencing what may soon become the longest bull market in 150 years. Many investors are apprehensive about the end of the market cycle. I believe these three factors support the case for informed investor confidence.

EARNINGS GROWTH

In the first month of 2019, the S&P 500 posted the strongest January gains since 1987. There are few factors more correlated to the long-term direction of the market than earnings growth. Corporate earnings growth is expected to normalize as tax cuts roll off and global growth slows. EPS growth expectations, however, remain positive through 2019.

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CONSUMER CONFIDENCE

Consumer confidence indices may have pulled back from recent highs, but they remain at the upper end of their historic range. That confidence has helped offset some damage from trade concerns.

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While consumer confidence declined along with the markets through the fourth quarter of 2018, levels rebounded in February with the gauge of Americans’ views on present conditions rising to an 18-year high. The Conference Board reported that its Consumer Confidence Index rose from 121.7 in January to 131.4 in February and The Present Situation Index improved.

REASONABLE VALUATIONS

Valuations look more attractive than they have for some time, with markets having pulled back to correction territory in conjunction with expanding earnings. With earnings growth of the S&P 500 in excess of 20 percent in 2018, we saw one of the largest multiple contractions in recent history. Following the market rebound in early 2019, valuations are only approaching long-term averages, and there remains a very strong fundamental backdrop in place.

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STAY THE COURSE, AIM TO MINIMIZE RISK

Risks that should be closely monitored in 2019 include trade negotiations with China, slowing global economic growth and communication of monetary policy by the Fed.

The Fed funds futures are increasingly pricing in the probability of a rate cut in 2020, which contrasts with where the dot plots are. The deviation is going to have to be reconciled, and communications missteps by the Fed could be a risk.

The brief inversion of the yield curve between the 3-month and 10-year Treasury in late March alarmed many investors. Historically, it has proven to be a reliable indicator of a recession; however, recessions have tended to follow periods of sustained yield curve inversion. Even if a recession does follow, that does not ensure a crisis. Panic surrounding brief inversions could even be a good buying opportunity, provided the fundamentals are supportive.

The views expressed are those of Carillon Tower Advisers and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice.

Matt Orton

About the Author:

Matt Orton is a vice president and portfolio specialist at Carillon Tower Advisers, a global asset management firm based in St. Petersburg, FL. He works with two of Carillon’s affiliates: ClariVest Asset Management and Eagle Asset Management. Orton also provides U.S. market commentary, strategy, and analysis for clients. Orton joined Carillon Tower in 2016. Prior to that, he worked at BNP Paribas and Goldman Sachs Asset Management in New York.