What's On Tap..

An Early Spring Thaw

After two weeks of snowstorms and frigid temperatures, I arrived at my desk following the Presidents Day holiday to the promise of record high temperatures. The uncharacteristically warm weather has arrived at the same time that the global economy has begun to heat up.

On Tuesday, a euro-zone manufacturing index hit a 70-month high. The employment component of that survey reached its best level in over nine years, and new orders were strong. Here at home, confirming the high level of optimism among business owners, the Philadelphia Fed's Manufacturing Business Outlook Survey came in at its highest level since 1984. The Citigroup Economic Surprise Index, which measures surprises to market expectations, has broken out to a new high.

This strong economic data, along with recent comments from the Federal Reserve, increases the likelihood that policymakers will raise the fed funds rate in March. Yet, while the major stock indexes continue to make new highs, bond investors have remained complacent, and the 10-year Treasury yield has been stuck in the 2.30%-2.50% range.

Along with the economy, earnings continue to improve and early expectations are that they will increase at a double-digit pace in 2017, particularly if corporate tax reform, reduced regulations and infrastructure spending come to fruition. Economists at JPMorgan Chase estimate that even modest tax reform could boost earnings for companies in the S&P 500 index by better than 8%.

Bearish investors rightly point out that valuations are extended; the forward P/E of the S&P 500 index, at 17.4, is marginally above the 20-year median. However, rising earnings could help to ease valuation concerns.

As major indexes continue to hit record highs, investors are tempted to call a top in the market, and every mild stock dip is met with calls for a much larger decline. Given that the S&P 500 index has hit 137 record highs since the end of the financial crisis in 2009, investors have had 137 opportunities to "sell at a high."

Rather than a kneejerk response, we believe it is more important to remain vigilant and aware of the many risks that exist for investors today. Pursuing both traditional and tactical strategies allows your clients to stay the course.

As always, thank you for your continued support and confidence.


           Stephen E. Johnson, JD, CFP,                                     Portfolio Manager

           Stephen E. Johnson, JD, CFP,                                     Portfolio Manager


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