The most recent set of core inflation data was met with mixed results, as we’re still hovering around or below inflation targets in North America, despite unemployment fluttering around historic lows and impressive job growth numbers that are coming in on a monthly basis.
This interesting reality we now live in, which involves a highly accommodative stance by most central banks around the world and slowing growth simultaneously, is incredible.
There are questions around whether the U.S. Federal Reserve of the Bank of Canada might cut rates further in Q2, noting potential downside risks relating to slower growth and slower-than-expected inflation (because we certainly don’t want deflation).
In the face of this potential tailwind, businesses continue to churn out relatively impressive results, stoking expectations further, and ultimately resulting in a significant multiple expansion which has driven valuations and stock prices much higher than earnings might otherwise suggest.
My expectation for Q2 is a slowing down of market exuberance, with a much needed breather taken by financial markets and its participants.
We’ve simply gone too far too fast right now, and I expect some investor fatigue to set in as the near-term future becomes murkier (such as shown in the conflicting data mentioned above).
I would expect to see a sideways trend for some time, as investors evaluate the various multiples companies are trading at, and decide if they believe earnings can grow fast enough to bid these enterprises up further.
At this point in time, I’d recommend investors make their portfolios more defensive and focus on adding companies with high-quality earnings, stable balance sheets and non-cyclical business models that can withstand some pressure from the market.
Invest wisely, my friends.
