The market posted its second straight weekly decline last week, after opening the year on a nice winning streak. Both the Nasdaq and the S&P 500 were down a bit more than 1% in the holiday-shortened trading week. Industrials, materials and financials led the decline.
This is not surprising, given the extent of the post-election rally. This is especially true given that the new administration has failed, to date, to repeal and replace the Affordable Care Act. This was supposed to be the fulcrum of an ambitious legislative effort. These initiatives included tax and regulatory reforms, as well as a large infrastructure spending bill. Failure to act on the healthcare front has caused a loss of momentum in these other areas, for which the hopes were a primary driver of the recent rally.
Projections for first-quarter GDP growth continue to be revised down. GDPNow believes first-quarter economic growth will come in at about a half a percent currently, down sharply from the approximately 3% level it envisioned to begin the year.
Business confidence has spiked since the election and consumer confidence in February posted its highest monthly level since December 2000. However, this has not translated yet into more consumer spending, as both retail and restaurant sales have been weak to start the year.
Slow economic growth in the first half of the year has become an established trend since the "Great Recession", with 2011 and 2014 starting out with economic contractions. However, with the warmest February in decades in 2017, one cannot blame the weather this time around. In addition, the "core" consumer price index posted a monthly decline last week for the first time since January 2010
Looking on the bright side, job growth remains solid despite the "miss" of the recent March BLS Jobs report, and the current consensus calls for much stronger GDP growth in the second quarter of this year. Profit growth projections for the overall market also stand at 10% as we begin first-quarter earnings season. If the current forecast proves to be accurate, this would be the best quarter for earnings increases since 2011. In addition, Chinese economic growth just came in above expectations.
I am continuing to underweight financials, as I have throughout 2017. My view still is that the rise in interest rates will be slower than investors were counting on when they piled into banks and insurers immediately after the election. Regulatory reforms will also take longer to be enacted than many were hoping for as well.
I have raised my cash allocation a bit recently, as the market looks fully valued overall. If we do get a decent pullback, I will continue to add to steady growers who can drive profit growth without resorting to price hikes. Names like Celgene (CELG) and Expedia (EXPE) fit that description perfectly and already have reasonable valuations, given their growth trajectories. Hopefully the recent slowdown in economic activity turns out to be just another slow start to a new year.
At the time of publication, Bret Jensen was long CELG, EXPE, although positions may change at any time.