Last week was fairly uneventful from a market data perspective, as all eyes continued to be glued on Washington and the almost constant coverage of the Trump administration. On the economic data side, the unemployment report confirmed the continued creation of new jobs. During January, 237,000 new jobs were added compared to an expectation of 175,000. Despite the strong gain in new jobs, the unemployment rate ticked up by 0.1% to 4.8%, and average hourly earnings disappointed expectations by only increasing 0.1% versus an expected 0.3% increase. Stocks and bonds gained on the jobs report, as job growth without inflation helped support asset valuations.
Over the last several weeks, I have had numerous conversations with market participants who have expressed their concerns about the economy, equity valuations, geopolitical events, tax reform and corporate earnings. I tend to share these concerns and currently view U.S. stocks pricing in relatively positive outcomes on all of these fronts, which leads me to believe we have downside risk to the market.
With that said, over the years I have learned to always be skeptical of my opinions if they are consistent with the market consensus. Consensus expectations can be difficult to derive with precision, but they are essential to determining the risk with any one particular market view as it is potentially already priced into the market. This risk tends to be elevated when uncertainty is elevated. The more in-line with consensus expectations you tend to be, the greater the risk that markets will trade against your view. I am always somewhat skeptical of my own view when it is in-line with consensus, so I do think the potential for equity valuations to rise is greater than what is priced into the market currently.
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