Everybody’s working it. The employment report on Friday showed 196k jobs added. The unemployment rate remained low at 3.8% and wage growth kept at a strong, but not too strong, pace of 3.2% year-over-year. From the equity market’s perspective, that is a Goldilocks reports – not too hot and not too cold – so it is not surprising that equity prices continued their melt up. The S&P 500 is just about 1% away from its historic high on September 20th last year of 2,930. Traders are feeling good!
It is important to maintain balance in this environment. Much of the reason for the equity rally to start 2019 is the Federal Reserve backing off from “auto-pilot” tightening. While that may not seem like a big boost on the surface, consider that the Fed futures curve went from forecasting 0.5% in hikes in December 2018 to pricing in 0.5% in cuts in April 2019. That is a full 1% shift in expectations which ignited a rally back to full P/E valuations. The Fed only has two more bullets of that magnitude left in traditional rate cuts (2.5% current Fed Funds rate less 0.5% cut expected equals 2% before we hit a zero-bound again). At this point, equity markets are pricing in a continuation of current conditions: good but not great. We expect this equity market to continue to tick slowly up for now but will have to reckon with fundamentals eventually. In our experience, nothing stays “average” for long as we are typically either in a trend that is improving or deteriorating. There is a long list of items which could tip us towards either direction. Until we gain confidence in whether fundamentals will “work”, we remain patiently on target and comfortable in quality.