Against Seemingly Long Odds, Winning Streak Continued in September and 3Q Week Ended 9/29/17

Despite what going in appeared to be a brewing cocktail of worries for investors set against a backdrop of above-average valuations and historic-low volatility, September 2017 will be one for the history books. It concluded as the least volatile September in 66 years. The month also saw the S&P log its 41st record high of the year (10 of which occurred during September alone). These amazing highlights stand in stark contrast to what is historically an average loss of -0.5% during the month of September AND the seemingly stacked worries of straining North Korea relations, destructive hurricanes clobbering the south, and ongoing Washington dysfunction including a looming debt ceiling and Federal budget resolution to name the most obvious. The point of all this however comes back to a question theme we increasingly hear from clients and financial colleagues alike: how is the market managing to seemingly ignore and become detached from what appears to be an anything-but-rosy rosy backdrop?

The question is valid; but perhaps misses the other side of the story. Admittedly, the headlines over the last 18 months have been nothing shy of discouraging and full of worry-worthy potential. But they are also detached from what is supposed to drive asset prices over time: fundamentals. In that regard, it needs to be acknowledged how much is actually going right. One research group recently adopted the phrase that while the US growth backdrop is certainly not the strongest in memory, it is one of the clearest in terms of the supporting message and direction. This includes that global growth has become synchronized, inflation is restrained, monetary policies remain stimulative, deregulation is a focus, consumer net worth is markedly rising, credit spreads remain accommodative of corporate America, a weakening US dollar is helping companies with foreign sales, and tax cuts are still possible. All of these should probably be viewed as at least partly responsible for why the market manages to continue establishing new highs even as monetary policy looks destined to continue normalizing and tightening at what is intended to be a boring pace. Worth noting: 3Q dividends were up +8.4% over last year; its often been said that profits are an opinion, but dividends are a fact and in this regard it seems most logical that financial markets are continuing to rise and business confidence supportive.

Listing the fundamental reasons for why the economic and fundamental picture is not to suggest that risks do not exist. But it also continues to be the case that perhaps the best reason to be bearish is there is no reason to be bearish. Also, while historical averages for both time and magnitude of market cycles are not on the side of this current market being able to continue (bull market is both longer and bigger than average) age alone does not have the power to change the fundamentals supporting it. Rather, some exogenous factor will ultimately be the cause for the current cycle ending. With an eye toward the 4Q, historical precedent suggests that as long as corporate earnings continue to advance, a recession is of low probability. And, the 4Q is often the strongest from a seasonal perspective, especially when September was positive. Taken together, while valuations feel high and a modest pullback called for by skeptics remains elusive and probably overdue, it would seem ones best bet is to remain disciplined and invested. Be on watch for our quarterly newsletter to publish on these pages and/or arrive in your inbox in the coming days. We hope you find it helpful.

Posted in Blog Post.