April Was Kind to Global Markets

April was kind to global markets with widespread positive returns for the major asset classes last month. The only loser: broadly defined commodities, which dipped for a second month. That being said, with fiscal policy changes likely delayed until later this year, and with the economic growth rate slowing, it’s no surprise that stocks have stalled a bit. The good news is that corporate earnings are on the rise.

Corporate Profit Growth

Here in the U.S., we’ve been experiencing a recovery in corporate profit growth, bouncing back from the decline we saw in profits we had in late 2015 that extended through much of last year. Much of that had to do with the global slowdown, the drop in oil prices, drop in foreign demand, foreign exports falling, and weak global manufacturing. What we’ve had since then, over the last couple quarters, is a rebound from those very low levels. A lot of it is tied back to improving fundamentals in energy companies, industrials, and in many of the areas that are more exposed to the global economy.

Fully Valued or Overvalued?

The question remains though, whether the U.S. market is fully valued or overvalued. It has already priced in a sizable earnings gain, and now we’re at a crossroads with regard to fiscal policy, and it’s also facing increased geopolitical tensions in North Korea, Syria, Russia, and multiple European elections. Cheap markets are better able to withstand external shocks than expensive markets, and U.S. stocks are not cheap. At its current trailing P/E of almost 21 times earnings, I believe the U.S. market is fully priced and, therefore, a bit more vulnerable to external risks than it otherwise would be. The key here is to be able to weather the volatility and respond quickly to any market shocks.

Emphasis on NASDAQ and S&P 500

At present, we remain engaged in the market, with a heavy emphasis on the Nasdaq and S&P 500. We’ve recently paired down our exposure to the global developed markets, as well as our holdings in the Russell 2000 small cap index as they appear to have peaked near term. Emerging markets continue to chug along, and we are riding alone it with a solid exposure to the BRIC (Brazil, Russia, India, China).

Maturing of the Economic Climate

One particular thesis we’re monitoring is the maturing of the current economic climate. We believe we are in the latter stages of the business cycle, and to that end we anticipate the energy, materials and industrial sectors to outperform, particularly in the latter half of the year. To that end, we are keeping a little powder dry to allocate some discretionary funds into those sectors as soon as our model give us an entry signal.

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