A 1990’s Market Flashback
Last week served up another round of positive U.S. economic data. Consumer confidence is strong throughout, increasing to a 17-year high. Surveys of current business conditions remain elevated, and in some cases, suggest increasing momentum in the months ahead. Productivity increased. Congress made progress on tax reform.
There’s no doubt the U.S. economy is on solid footing. The effects of which are reflected in corporate earnings – currently running 7% higher than this time last year. However, with economic indicators all elevated, is this exuberance with a risk of an impending reversal?
We believe this is the beginning of a late-cycle growth spurt, driven by improving CapEx, rising productivity, increased consumer spending, and technological advances. Interestingly, it seems quite reminiscent of the late 1990s, which were characterized by much of the same, including low inflation.
Some key structural similarities include the influence of technology and globalization on prices, but today, we have an even more intertwined global supply chain.
Another notable difference is the structure of the technology sector. First, tech companies generate earnings due to the rapid expansion of the digital economy. And second, while tech stocks decoupled from underlying fundamentals in the ’90s, today’s values are much more reasonable (Figure 1).
Figure 1: Compared to the Late ’90s Tech Bubble, These Stocks Are Fairly Valued Relative to the Market
Tech Valuations vs. S&P 500
Sources: Thomson Reuters Datastream, New York Life Investments, 9/30/17.
So, we stay constructive on equities supported by low interest rates, momentum, economic activity, and the potential for tax reform. With elevated pricing, consider using an active manager who can identify strong market trends.
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