by Connor Darrell, Head of Investments
Despite a bumpy ride mid-week, U.S. stocks managed to push higher on the heels of a strong Thursday rally. Globally, markets remained jumpy amid a softening economic growth outlook and lingering concerns over instability in the Turkish financial system.
While foreign economies have struggled to gain momentum, the U.S. has been able to break the barrier and establish a more sustained period of economic strength. With two solid quarters of GDP growth behind us, many investors are looking for insights into whether that growth momentum can be carried further; and for how long. One potential window was opened last week with reports of strong retail sales growth (+0.5%), which was further demonstrated in Walmart’s quarterly earnings release. The country’s largest “brick and mortar” retailer posted its best sales growth in over a decade, suggesting that the U.S. consumer is still in a strong position to help keep the momentum going.
Strong Momentum Can Shift Expectations
While the strength of the U.S. economy should help to alleviate any concerns that the next recession will occur in the near future, it doesn’t preclude us from experiencing periods of market weakness in the meantime. We have discussed in the past that the global investment landscape looks quite a bit different now than it did a year or so ago, and that there are more risks that threaten to bubble up and cause disruption in markets. The currency crisis in Turkey is but one example of the types of obstacles markets may face as they continue to scrape higher.
But another potential “obstacle” is the shifting of investor expectations. Markets are naturally forward-looking instruments, in that the price of any given security is determined by the aggregate of investors’ expectations of its future growth opportunities. As companies continue to post strong profit numbers and investors keep hearing about how great the economy is, the natural result will be for them to raise their expectations of future performance. And it is at the point where expectations meet reality that markets can become a little unstable. Often, markets react more to relative changes than to whether something is “good” or “bad” on a standalone basis. In other words, the U.S. economy may remain “strong” but if it fails to keep pace with rising expectations, the market may not react as positively as might be expected. As the U.S. economy keeps humming along, investors may run the risk of setting their expectations too high and would be well advised to maintain a more balanced, pragmatic approach to portfolio construction.