Stearns Financial Fireside Chat – April 2, 2017

Welcome to the Stearns Financial Fireside Chat.

U.S. economic growth appears to be accelerating modestly. In our view, manufacturing is improving, home demand is on the upswing and consumer spending is stable (albeit a bit soft in some areas, based on some cooling of consumer euphoria). At the same time, inflation appears to be creeping higher.

The Republican Party’s health care setback has created more uncertainty about the prospects for corporate tax and regulatory reform. Our sources tell us the likelihood of these reforms being passed remains high, despite the complex issues involved and fractured environment created by the health care debate. However, any disappointment in getting these pro-growth measures passed would be a very good reason for a U.S. stock market correction. [See discussion in FAQs below.]

Meanwhile, international stocks are currently sprinting ahead of U.S. stocks. Perhaps the long underperformance of this category is at an end. However, Trumponomics variables remain front and center in determining how these overseas returns will compare short-term to more fully priced U.S. companies.

Key Points to Consider:

  • Ned Davis Research reports that the PCE Price Index, the Fed’s preferred inflation gauge, rose 0.1% for the month, and was up 2.1% year over year, the most since March 2012, largely due to the rebound in energy prices. It exceeded the Fed’s 2.0% inflation target for the first time in almost five years. Core PCE prices rose 0.2% for the month, and were up 1.8% year over year, the most since July 2014. 
These trends suggest that while inflation is picking up, there are no excessive price pressures yet. This should allow the Fed to continue with gradual interest rate increases this year.

Frequently Asked Questions

Q: I hear more people talking about a possible stock market correction after the failure of health care reform. How do these two link together? Should we be concerned, or would it be a typical 5-10% correction?

A: This ties to the confidence issue discussed above. If it looks like pro-growth policies for corporate and regulatory reform will stall, then extra growth for the economy and corporate earnings won’t be forthcoming. This will disappoint some shorter term traders and potentially cause a normal correction. Note that 5-10% has been more normal lately, but longer term, the average correction every one to two years is 14%, even in years where the stock market ended up 10% or more.

A typical correction in the near future would be normal. If the GOP gets its factions together and passes good business reforms, perhaps the euphoria will move the stock market up before the next correction. Fact is, no one knows the answer to what pattern will play out here. There are too many variables.

Nothing indicates at this point that a greater than normal correction is in the cards. It would take multiple items from our worry list (Editor’s note – these were listed in the March 5, 2017 SFG Fireside Chat) to signal a more major correction.

History suggests that investors with more than a five-year time horizon are rewarded for remaining rational during emotional times and not selling quality companies with good future prospects. So how will you prepare for what might be a few months in the near future that could be a bit bumpy? Our best advice is to make sure you have the cash you need for shorter term goals, plus enough cash to “sleep well.” It’s good to keep in mind that a typical 10% correction – a 2,000 point pullback on the Dow – would return us to early November 2016 levels.

We can count on the media to use words like “Crash, Plummet and Worst Since.” Don’t let the 24/7 media machine create anxiety. No matter what your view of what’s happening in Washington D.C., the real U.S. economy remains in good shape.


The failure of Congress to pass health care reform has called into question their ability to enact other pro-growth measures. It appears there is more consensus on these business reform areas, but gridlock risks are present. The U.S. economy is solid and many overseas economies are also showing better strength. China remains an unknown factor due to recent less-optimistic economic news.

Dennis, Glenn, John & PJ
(the SFG Investment Committee)

324 W. Wendover Avenue, Suite 204
Greensboro, NC 27408
Telephone: 336-230-1811/ nationwide 800-881-7374

1450 Raleigh Road, Suite 105
Chapel Hill, NC 27517
Telephone: 919-636-3634/ nationwide 800-881-7374


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