Always Beneficial & Enlightening
Revisiting ‘Context and Perspective’
May 15, 2018

We recently wrote about context and perspective. The essence of the discussion was to explain the circumstances we encounter on an ongoing basis and how piecing them together provides a broader, long-term philosophy and process for making economic and investing decisions.

The timing of the blog on context wasn’t happenstance. We do believe there are some cycles that are nearer peaks and troughs than we have seen for some time; notably interest rates, inflation, commodity prices, asset prices and the current economic expansion.

Our perspective is that interest rates have put in a long-term bottom and will be more up than down in a long-term cycle. Inflation pressures are beginning to appear in the US economy and will continue building. Commodity prices may have troughed and could be rising more than falling in the next cycle. Asset prices in most sectors and asset classes have been rising for a historically long period and will slow in their price growth and expected returns. The current economic expansion, following one of the more severe economic contractions, is also historically long in duration and will eventually overheat leading to a recession.

The real difficulty in piecing together context into perspective is the timing of events; i.e. the speed and depths at which cycle’s peak and trough. The key then is to pay attention to the most significant attributes of the cycles and disregard the noise that distracts one from their intentions. The clues are there and they do develop into patterns.

In week ending April 27, the 10-year treasury broached the 3.00% rate for the first time since January 2014. This is off an intermediate low of 1.37 reached on July 5, 2016. (Source: Treasury.Gov).

A few companies provided earnings and revenue numbers that met expectations, but delivered guidance that future earnings may be reduced. The market responded by taking down prices across the board.

Page one of the Friday April 27 Wall Street Journal led with an article entitled, “Companies Feel Impact of Oil’s Rise”. Industrials and airlines have warned that higher input costs could increase expenses and reduce earnings if the costs cannot be passed on to the consumer. Crude oil has reached $70 and has been above $60 for most of 2018. The average price of gas is $2.80; the highest it has been since June 2015.

The rhetoric on low unemployment numbers and wage inflation is picking up. Government reported unemployment stands at 3.90% (U-3 numbers) and the lowest reported number since 2000. It is the 91st consecutive month of unemployment gains.

Though the average monthly gain has been reducing since 2014, payrolls continue to expand. A tight labor force and increasing wages are seen in many important areas of the economy. The trades, trucking and manufacturing jobs cannot be filled fast enough and wages are rising faster than average. (Bloomberg May 4, 2018) Wage inflation is modest at this point, but it has been a long time coming for many parts of the economy. The cycle has turned and appears to be heading in an upward direction.

Change is an unsettling thing to human nature. And as we have said in recent posts, these circumstances will lead to fear at given points in time and increased market volatility. Preparation and awareness are the keys to taking advantage of the opportunities that will be the result of these changing cycles and investment prices.


Views expressed are not necessarily those of Raymond James and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

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