In recognition of the Martin Luther King Jr. holiday, this commentary is as of Tuesday, Jan. 21.
U.S. equity markets closed last week at new all-time highs. Foreign markets appear to be in the process of bottoming out after several years of underperformance. We are starting to hear a lot of predictions that foreign markets are the place to be going forward. Of course, take these predictions for exactly what they are – predictions. Nonetheless, risk on assets are continuing to see money flow in the face of strong U.S. corporate earnings. Bond yields remain subdued and rangebound. The 10-Year Treasury Note has traded between 1.70% and 1.95% for the past three months. Low interest rates in the face of positive earnings result in a “Goldilocks” scenario, whereby we have a near perfect environment for equities. This condition lasted throughout 2017 and has resumed over the past few months. Commodity prices (i.e. inflation) are also in check, which takes pressure off the Federal Reserve to raise rates. Chinese markets are taking a big hit today due to fears of a SARS-like virus outbreak. Otherwise, it is hard to complain about investing around the world at the moment.
Let’s continue to watch earnings as they come in for signs that we have gotten ahead of ourselves. Prices clearly indicate that earnings are expected to be very, very good. We will take it day-by-day.
A Goldilocks economy is not too hot or too cold but just right—to steal a line from the popular children’s story Goldilocks and the Three Bears. The term describes an ideal state for an economic system. In this perfect state, there is full employment, economic stability, and stable growth. The economy is not expanding or contracting by a large margin. A Goldilocks economy is warm enough with steady economic growth to prevent a recession. However, growth is not so hot as to push it into an inflationary status. Source: Investopedia.com.
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