What Would Goldilocks Do?
by Jim McElroy, email@example.com
So far this year, the S&P 500 has broken its previous record high six times and has appreciated about 8% since the end of 2016. The run actually began in the last two months of 2016, after the election, when optimism surged over the new administration’s market friendly plans. The prospect of less onerous financial regulations, tax reform with tax cuts, billions in repatriated overseas corporate profits and much needed infrastructure construction trumped the previously held conviction that the world was coming to an end. Lately, however, the euphoria has waned: Congress has not been cooperative, the president’s style has so far been counter-productive and now there’s a special prosecutor on the hunt for impeachable offenses or crippling legal processes. So, since the thrill of political new hope and new change that drove the market to new highs is largely gone, why isn’t the market reversing course?
Forgive our skepticism, but we’ve never had much faith in the ability of politics to single handedly alter the course of economic cycles; from our perspective, the effects seem to flow in the opposite direction. The market, for now, is paying more attention to economic possibilities than to political dysfunction. And although the recent reports of economic strength don’t suggest acceleration, they also don’t suggest weakness; not too fast and not too slow is, of course, the Goldilocks scenario. As long as the market foresees a steady and gradual improvement in future economic conditions, and as long as the preponderance of actual data reinforces this forecast, equity prices should continue their upward trajectory. So far, nothing definitively predicts an overheated boom or a collapsing bust — the porridge is neither too hot nor too cold — but the statistics deserve close monitoring.
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