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4/3/14 – The Trend Is Your Friend

Written by Brad McMillan, CFA®, CFP® | Apr 3, 2014 6:30:00 PM

I’m at the Commonwealth Winners Circle conference this week, talking with our financial advisors and having a wonderful time. The Arizona weather is a huge improvement on that of many parts of the country, which is lightening everyone’s mood. Even as we enjoy the better weather, though, one of the questions that keeps coming up is whether the current positive trends in many areas will continue, or change, and how will we know? Is the better economic weather transitory, or is spring really on its way?

The focus of my talk here was signals that have worked in the past to help us see ahead to just that kind of change. I have written about many of them before, here on the blog. For the economy, changes in consumer confidence and private employment, year-on-year, are among the more successful warning signs, while for the stock market, moving averages are worth looking at. On a more immediate level, though, people want to know where we are right now. Is spring finally on its way?

The short answer is in the title of this post. Right now, almost all of the trends are favorable. Employment continues to grow, despite the snowdown, and looks like it’s actually starting to accelerate again. Business confidence and investment are rising. Consumer spending is strong and is based on wages, not borrowing. Things are moving in the right direction. Spring is on its way.

You can see this in the stock market, too, where the trend has been up for some time. This is, in part, a reflection of the economic recovery. It’s also partly due to the ongoing if decreasing Federal Reserve stimulus and—increasingly, in my opinion—to the fact that investors expect it to continue.

All of these factors look likely to persist. The question then becomes, what could derail this? Are there any storms pending?

The data seems to show that the U.S. economy is positioned for sustainable growth. All of the potential warning signs are still green, and there are no reasonably foreseeable domestic events that could threaten that.

For the stock market, the trend appears equally solid. That could change much more quickly than the economic trend, of course. But investor sentiment remains solid, and the fact that investors have been trained to buy on declines over the past couple of years helps to support the trend.

Storms that could break these positive trends are largely outside the U.S. The Ukraine situation could potentially derail the European recovery, while the slowdown in the Chinese economy could accelerate. Either one might hurt the U.S. economy and markets; on the other hand, the U.S. could just as easily benefit from a flight to safety or a perception of better relative growth.

Clearly, then, the old saying rings true at the moment: the trend is our friend. Spring is indeed on its way. Let’s enjoy it while we can, even as we keep an eye out for another change in the weather.