Indicators make investment strategies more cautious

James Swanson
James Swanson

Phil Castle, The Business Times

A lengthy expansion that’s seen record-level cash flows and profit margins shows signs of slowing down, and that has James Swanson feeling more bearish than bullish about the stock market.

Swanson believes a more conservative investment approach could be in order that involves a little less stock and a little more bonds and real estate.

The chief investment strategist of MFS Investment Management shared his outlook in a presentation in Grand Junction. The Oakley, Wanebo, Love, Mendenhall and Keller wealth management group of Wells Fargo Advisors hosted the event.

In addition to his role as chief investment strategist for the Boston-based MFS Investment Management, Swanson also runs the MFS diversified income mutual fund and manages $4 billion in assets.

Swanson said he keeps close tabs on fundamentals, among them the business cycles between economic contractions and expansions.

Since World War II, business cycles in the United States have lasted on average about five years, Swanson said. The longest cycle lasted 10 years. The latest cycle that began in June 2009 is now in its ninth year.

Swanson said the economic expansion that’s followed the Great Recession has seen record levels of free cash flow, a measure of a company’s financial performance that represents the amount of cash left after spending the money required to maintain or expand its asset base. Corporate profit margins also have climbed to record levels, he said.

Labor costs have remained low in the United States and around the globe even as companies also have used technology to increase productivity, Swanson said.

Between the bear market low in 2009 and bull market high so far in 2017, the Dow Jones Industrial Average has increased nearly 240 percent.

The situation could be analogous to mountain climbing, Swanson said. “As you get closer to the summit, you take more and more risk.”

Compared to the long-term average for the ratio between price and earnings, U.S. stocks have become more expensive, Swanson said.

Meanwhile, the numbers for free cash flow and profit markets are falling, as are other indicators, he said. Corporate profits as a share of gross domestic product, the broad measure of goods and services produced in the country, have declined, he said. “That, to me, is a warning sign.”

Retail sales are starting to flatten, as are sales of new homes and cars as well as bank lending, he said. “There are signs the whole thing is slowing down.”

Some of the recent increase in U.S. stock markets could be attributed to expectations corporate tax rates will drop and regulations ease under the administration of President Donald Trump. If that doesn’t occur, though, those markets could be vulnerable to disappointment, Swanson said.

Swanson said he’s taking more conservative investment approach that involves a little less stock and a little more high-quality corporate bonds and real estate.