It may be hard to believe, but we are now 9 years removed from the depths of the worst financial crisis since the 1930’s! According to S&P Dow Jones Indices, it’s official - this U.S. “bull market” has become the longest on record since World War II by avoiding a 20 percent or more decline for 3,453 days. (SEE attached chart Bull Markets since World War II). The market has risen more than 300 percent since its low 9 years ago, and my suspicion is that many of you remember it very clearly as the stock market dropped by almost 50% at its deepest. The big question on everyone’s mind is, “Are we more or less vulnerable today to a shock of that magnitude?”
As summer has ended and fall is upon us, we suspect there will be a no shortage of more news worthy events to follow; with more presidential tweets, mid-term elections, a potential trade war, and an ongoing Mueller investigation (that has now taken down some in president Trump’s close circle). However, for now, the fundamentals seem to be strong and this constant noise does not seem to be impacting the market in any meaningful way. Does that change if we start to see some of these key economic reports start to soften?
Today we have a Federal Reserve that has raised interest rates 8 times in the last two and a half years, with an understanding that more rate hikes are likely in the future. Will the Federal Reserve finally move from an accommodating policy to a more restrictive policy?
The US Economy advanced at an annualized 4.2% percent in the 2nd quarter of 2018, up sharply from a 2.2% reading in the 1st quarter of 2018. This was the strongest growth rate since the 3rd quarter of 2014. Estimates put full year 2018 GDP somewhere near 3%. Lower corporate taxes, less regulation and increasing government spending have pushed business and consumer confidence levels to multi decade highs.
Stock prices over time are driven by corporate earnings and the multiple that investors are willing to pay for them. Unfortunately, almost every stock market valuation tool we look to, from the Forward P/E Multiple; Trailing P/E Multiple; Shiller Cape P/ E Multiple; to even a Price-To-Sales Ratio; show a stock market that by all accounts is on the higher end of valuation. (SEE attached chart Median Trailing P/E Multiple for all U.S. Stocks).
James Paulsen, Chief Investment Strategist of the Leuthold Group, LLC, has stated: “Valuation risk alone does not imply an imminent end to this bull market, its remarkable expensiveness, however, does suggest limited upside potential during the rest of its run, eventually a significant revaluation process is possible.”
A sound strategy is to not react to the latest news headline or tweet when it comes to your investment portfolio. This bull market could continue a bit longer, but I think it’s wise to anticipate we are in the 7th or 8th inning of this ball game. (But remember, games can go extra innings!) There is always the risk of a sudden shock that could disrupt the economics which are currently supporting equities. A well-diversified portfolio has been a solid way to navigate these markets over time. It certainly makes sense to consider re-balancing some of that stock side growth in this latest bull market to the fixed income side. Or consider cutting back equity allocations a bit more in the next year or two.
Of note, with interest rates on the shorter end of the curve moving up the most - Short term CD’s and T-bills are yielding more, with a 1 year T-bill yielding close to 2.60%. GNMAs, that we had used over the years are creeping up, with yields now close to 3.45%. My guess is with the longer-term commitment needed with a GNMA, the tipping point when we may start buying those again would be at 4%.
Of course, each situation is different and we ask that you please reach out to us with any questions that you may have regarding your current finances. As stated in the past, it is very important that we review your investment portfolio with you at least annually and we look forward to speaking with you, either by phone or in person, whenever you are available.
Bryan Bastoni, CFP
