The first quarter was full throttle “risk-on” for U.S. equity markets. The S&P 500 came out of the gates screeching and clocked more than 10% for the quarter. This rally seems to have rekindled animal spirits, and now the strength of the U.S. economic recovery is the toast of the town. From a macroeconomic perspective, a continued expansion would imply further equity market strength.
However, some potential risks remain. According to the National Bureau of Economic Research (NBER), U.S. economic expansions last three to four years, on average. The current recovery, that began in 2009, is already three years old.
In addition, a simple look at financial market performance could warrant some caution. The returns on typical risky and early cycle asset classes like stocks and commodities have steadily moderated since 2009, shown in Figure 1 below.
We realize that market timing is futile, and we are not trying to time the business cycle’s peaks and valleys. We’re simply pointing out that the economic expansion may not be as certain as many believe, and that investors should chase fast money with caution.
Victor K. Lai, CFA