Markets
It is always hard to know where we are in a market cycle at any given time. Given today’s unpredictable political climate and geo-political risks, it makes it even more difficult. And it becomes even more confusing when so many economists “data mine” economic reports to justify their view. We feel like it is important to provide some color around what seems to be a sense of caution creeping into the market. Indeed, in today’s headline crazy environment the same report will be used to support both a bullish & bearish view on CNBC. For example, is the market over-valued?
Goldman Sachs issued a report in late July that suggested the forward P/E multiple of the S&P 500 has risen by 80% since 2011 and the trailing PE ratio of 22.1 is well above the 10-year average of 16.7%. Sounds pretty scary, right?
Richard Bernstein points out that average rolling 5-year annualized returns for Bull Markets is 21.4% but the current return is 14.8% which, far short of typical bull markets final run. He argues strongly that the three primary investment factors are profits, liquidity and investor sentiment - all three of which are constructive in his view.
Two very highly regarded sources with very different views. In times like this we think it is useful to understand what is “normal” in relation to the market. According to Forbes:
Since 1950 there has been ONE stock market crash (defined as a 50% correction or more) and that was during the Financial Crisis of 2007-08. The S&P 500 traded down more than 50% from its peak for 21 trading days.
The next most significant correction in the past 70 years was during the Technology Bubble of 2000-02 when the S&P 500 bottomed out -49.15% from its prior peak.
On average the S&P 500 corrects -10% about once per year, and -20% once per 3.5 years.
Human nature tends to take our most recent experiences and extrapolate them out into the future. In the case of the stock market, because we’ve had two nearly 50% corrections in the past 15 years, many investors are sure the next “big one” is right around the corner. Perhaps a better perspective is that while volatility - even to the extent of 20% corrections - is normal, a 50% type event is exceptionally rare.
Of course, there is no way to know for sure. That is why we continue to follow our Moving Average discipline across all asset classes. This quantitative and objective method has done an effective job of helping us scale clients’ exposures to different asset classes quickly in changing markets. We are confident it will continue to do so in the future. While no process is perfect, using a quantitative method removes emotion and allows for real time decisions to be made.
Year End Preparations
It seems bizarre to already be talking about year-end items but we are on the front end of the planning cycle for that stuff. Here are some things that we will be talking about with clients in the next couple of months:
Tax loss selling, off-setting gains and losses, etc.;
Gifting strategies to both family and charitable enterprises;
RMD’s coordinating with any qualified accounts you hold outside of TRUE;
Reviewing and updating your financial plan.
As always, we appreciate your continued support of TRUE and the Davis Altman Group. If there is anything we can do better to improve your satisfaction, please let us know.
Enjoy the last bit of Summer!
Brett, Steve & Becky
