Everybody is Happy! Q 1 Cover Letter

Everybody is Happy!

From Bloomberg Consumer Sentiment to Gallup Polls to the Conference Board and to our University Of Michigan Survey of Consumers (Multiple Polls reviewed in detail in our most recent Newsletter-coming to you soon) all are pointing higher, with some even pointing to all time highs.

A more pro-growth tone seems to have put wind in the sails of those polled as well as capital market participants. Heck, the most recent quarter even garnered an interest rate increase of a small .25% in the shorter term Federal Funds rate. Looking back just over a quarter and including December of 2016, there are now two interest rate increases under the FOMC’s (Federal Open Market Committee’s) belt. The first rate increase in this economic cycle, post 07-09 Great Recession started in December of 2015. According to many, created the “record breaking” rocky start a year ago. Fast forwarding to today, market participants and the economy for that matter, seem to welcome a normalization of short term rate increases.

Speaking of rate increases, under normal circumstances all other items being held equal, which then never are, interest rate increases are a muzzle on the economy and in many cases are the cause of a larger slowdown or recession. The problem with this comparison is rarely have short term rates been zero, which they were held at for over five years in this economic cycle. It is possible that an increase of rates from such a low level to a more normal level may actually be energizing rather than resistance as past comparisons may show.

Is there a downside?

Capital markets look forward, usually 6-12 months. All this positive sentiment has led to stretched valuations from a historical point. The current Price/Earnings ratio, again shown in our latest newsletter, finds itself at 26, with a long term average of 15. Just as economic cycles do not die of old age, capital markets do not go down just because their valuations may be stretched. Higher valuations can lead to less room for errors, not a time to let our guards down and also not a time to be swinging for the fences, however valuations can return to normal simply with all this positive sentiment translating into higher world capital market earnings. Said another way, “Growing into the current Valuation.” Time will tell, and we will be watching closely.

Spring seems to finally have sprung, enjoy !

Sincerely,

John A. Kvale CFA, CFP

Enclosure (Q 1 Report)

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