Pay Attention to Fundamentals

Marc Zabicki (00:00):

The amount of price momentum driving this market in recent years is a notable phenomenon. Simple price or trading momentum has been the number one factor in driving markets over the last 10 years, followed closely by market capitalization, meaning just buying the largest capitalization stocks over the last 10 years has been a lucrative strategy. But will it always be that way? In this latest edition of LPL Street View, we'll take an aggregate look at the directional change in fundamentals we have seen and suggest to you that while price momentum seems to rule the day at some point, fundamentals will indeed matter.

Marc Zabicki (00:43):

Let's be clear, the fundamentals of this market and economy still remain rather strong relative to history. The jobs market remains on solid footing. Consumer confidence is off its peak, but still healthy. Retail sales indicate consumers are still willing to spend. Corporate balance sheets are on fairly sound footing. And importantly, corporate profitability in terms of returns on equity are near all-time highs. So things are pretty good, and there has been more clarity and less worry over tariff issues. Equity prices currently reflect all of that. What raises our eyebrow, however, is this chart. It is the U.S. leading economic indicators, which is a broad, high level aggregate snapshot of economic conditions. Within this chart, we have plotted the directional change in the leading indicators. The blue line represents the three-month moving average of that directional change, and the copper line is the six-month moving average of that change.

Marc Zabicki (01:53):

What is notable is that when these averages fall below the zero line, which is the light blue line in this chart, this indicates that the leading indicators are in fact weakening. So what does this mean? We are not suggesting this leading indicator chart is a precursor to a definitively weaker economy or necessarily bad news for the stock market. But what we are suggesting is that this and other aspects of fundamental analysis still remain valid and important tools for your investment toolbox. There is more to assessing investment conditions than simply relying on current or historical price performance. The world is a much different place than it was last year and certainly five or 10 years ago. It takes some in-depth analysis to parse all the variables and assess them relative to the current market backdrop. Assessing price movement and other technical market conditions is indeed necessary work, but it is the fundamental work that provides you with a well-rounded picture, and it may help you build a portfolio that could raise the probability that you have a seat when the price momentum music stops. Thanks for listening, and as always, allocate wisely.