Market Correction or Plow Horse Economy?

This week the mainstream press headlines were plastered with reports of an impending market correction.

I saw this quotation a couple of weeks ago and thought it would be applicable to bring up here.

Chief economist at First Trust Advisors, Brian Wesbury, has been  referencing the present US recovery phase as a “plow horse economy” for several years. The economic recovery is neither fast or impressive, but it is not stopping.

Last week Brian said that the horse is now breaking free:

We’ve called the slow, plodding economic recovery from mid-2009 through early 2017 a Plow horse. It wasn’t thoroughbred, but it wasn’t going to keel over and die either. Growth trudged along at a sluggish – but steady – 2.1% average annual rate. 

Thanks to improved policy out of Washington, the Plow Horse has picked up its gait. Under new management, real GDP grew at a 3.1% annualized rate in the second quarter of 2017 and 3.2% in the third quarter. There were two straight quarters of 3%+ growth in 2013-14, but then the growth petered out. Now, it looks like Q4 clocked in at a 3.3% annual rate, which would make it the first time we’ve had three straight quarters of 3%+ growth since 2004-05.

Along similar thoughts of increased growth, Atlanta Fed predicting 5.4% GDP growth from Q1 2018:

Stock markets have historically functioned on 5 to 7 year cycles. Meaning that there is some form of a stock market correction every 5-7 years. Below is a graph showing the performance of the S&P 500 from 1871 to present time.


The last stock market correction was the 2008-2009 housing market collapse. That means we are currently sitting on almost 9 years without a correction. Based on previous events, we could experience a stock market correction at any time.

Some economists, like the above gentlemen, are of the mindset that the current cycle could continue for a while. The rationale being: the first 8 years of slow but steady progress was due to the huge injection of cash into the economy by governments and central banks. Central banks have injected $10 trillion into the world economy over the last 8 years, while companies generally stayed on the sidelines. So, although GDP showed positive growth, real grass roots level growth occurred at a lesser rate.

With the new tax cuts that President Trump has implemented, US based companies are making announcements virtually every day about some type of capital expenditures and expansion. In our opinion this bodes well for more sustainable growth in the next few years.

President Trump’s tax cuts may boost growth for the next few years, especially in certain industries and regions of the US. However, there will be some unintended consequences and distinct winners and losers. Higher growth also means higher inflation. Businesses and individuals who aren’t ready or willing to evolve to the new phase of growth and inflation are likely to fall behind.

Some very smart people believe that they are able to out maneuver the market. Sometimes they string together a number of years with outstanding returns, but some years the magic wares off. Recently, a number of the largest hedge funds announced layoffs and cutbacks after several consecutive years of losses, even though the market has been preforming well lately.

We like portfolio managers that take an understandable and consistent investment strategy that plows forward regardless of changes.  To paraphrase one of Warren Buffet’s famous quotes, he only likes to invest in companies that are simple to understand, and that produce goods or provide services the average person needs and wants.

Stay tuned for our upcoming take on cryptocurrencies and how we think they will foster innovation in the minds of traditional finance thinkers.

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