Brian B. Sullivan, CFA, President and Chief Investment Officer, Regions Investment Management
February 20, 2015
A column to help investors gain perspective on today's market noise
In school, I did not get very deep into differential calculus before the math was over my head and my mind drifted to other subjects, particularly economics. Therefore, it wasn’t surprising that I have never noticed the difference in the way mathematicians use the term inflection point and the way market strategists use it. An inflection point for stock jockeys and market watchers is when a stock or the market stops going up and starts going down or vice versa. For stocks the most recent one of these would be March 9, 2009 when the S&P 500 bottomed at 666. It is now 2,100. Picking the next inflection point is thought by most to be impossible. When will the market peak? I am not at all sure.
But what about the mathematical definition of inflection point? That is an entirely different place. That is a point between the top and the bottom of a curve at which the rise or the fall slows and begins the process of making a top or a bottom. If you think about a radio wave on an oscilloscope the inflection point would be half way up from the bottom. Predicting when one of these will occur in the future may be as hard as predicting a peak or a trough. But pointing out one in the past seems much easier. I think 2014 was likely the inflection point for stocks in this cycle. Therefore, 2014 would mark the beginning of the end of this bull market.
2014 had many characteristics which point to it being the inflection point. Corporate earnings were growing at the fastest pace in the cycle up until the fourth quarter when they slowed dramatically. Stock prices increased at 32% in 2013 but only 12% in 2014 and so far in 2015 only about 2%. Productivity increases have stopped being positive and turned negative which can’t help corporate profits in the future. The Federal Reserve quit QE and therefore ended the most aggressively accommodative period in our history. The dollar has risen so much that imports are 20% cheaper compared to domestically produced goods and our exports are 20% more expensive for anyone overseas looking to buy them. And lastly, worker wages seem to have finally turned up as businesses have hired all the cheap labor they can find. This will put further pressure on profits.
The rate of growth of corporate earnings, I believe has slowed. In turn this is slowing the rate of growth of stock prices and eventually we will have reached a peak.
Source: US Bureau of Economic Analysis, RIM
©Regions Bank, Member FDIC. The foregoing represents the opinions of the author, Brian Sullivan, and not necessarily those of Regions Bank or Regions Investment Management, Inc. (RIM). RIM provides commentary to clients of Regions Bank, an affiliated company wholly owned by Regions Financial Corporation. The information contained in this report is based on sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This report is designed to provide commentary on market strategy and the opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. RIM assumes no responsibility or liability for any loss that may directly or indirectly result from the use of such information by you or any other person. Investments discussed in this report are not FDIC-insured, not deposits of Regions Bank or its affiliates, not guaranteed by Regions Bank or its affiliates, not insured by any government agency, may go down in value, and not a condition of any banking activity. Investment advisory services are offered through RIM, a Registered Investment Adviser. RIM is wholly owned by RFC Financial Services Holding LLC, which in turn, is a wholly owned subsidiary of Regions Financial Corporation.
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