Focus on Fundamentals

by George V. Howe

During the past several weeks, we’ve seen news headlines dominated by everything from extreme weather to heightened geopolitical risks, with speculation on policy changes in the U.S. an ongoing hot topic. With so many events competing for our attention, how do we know where to focus?

As investors, it’s important that as we acknowledge the impact of these worldwide events, we remember to separate our personal sentiment from our investment strategy. This can be easier said than done, which is why it’s important to rely on trusted economic and market indicators to guide us in the right direction. In other words, focus on fundamentals. The fundamental backdrop for the economy and markets continues to look solid, indicating that the market should be able to weather the ups and downs brought on by the dizzying news flow. Earnings estimates remain strong and economic indicators suggest that the potential for a recession this year or next remains low—both of which reduce the odds that a small correction turns into a big one.

The Federal Reserve (Fed) is another consistent source of guidance on the economy. Although the Fed chose not to raise rates for the third time in 2017 at its September policy meeting, the meeting was not without action. The Fed announced that it would begin gradually shrinking its balance sheet, as expected, withdrawing some of the trillions of dollars it invested in the aftermath of the financial crisis. Perhaps more importantly, however, the announcement reflects the Fed’s confidence that economic growth and low unemployment will continue. Further supporting this position, the Fed indicated that a December rate increase is still likely.

As part of our assessment of the economic and market backdrop, we also must consider the U.S. political environment. We believe the potential for fiscal stimulus remains and expect that we may see a tax deal out of Washington, D.C. early next year. Our view does seem to be in the minority, however, and we acknowledge that political divisions in Washington could impede a reduction in tax rates—corporate or individual (or both). Because consensus expectations for a tax agreement have declined, it does lessen the chance that stocks would fall sharply if a deal is not passed.

Against this generally favorable backdrop, the stock market has continued its steady advance—going 10 months since the last 3% decline. While the market environment is positive, it does put us on watch for a potential pullback. It’s healthy for a market to experience small declines, as a way to refresh and set up the next move higher. But be mindful that pullbacks can often be accompanied by potentially unnerving headlines, which is why it’s important to be prepared for them and remember the fundamentals. Based on the current environment, we would view pullbacks as opportunities to buy at lower prices, especially for those who are underinvested relative to their long-term targets.

Our emotions naturally tend to influence our actions, but with a well-thought-out plan, a focus on fundamentals, and sound guidance, we can ensure that we stay on course to reach our goals.