Racing Higher, But Pace Seems Impossible to Sustain – Week Ended 1/19/18

The melt-up as it is being more widely referred to, continues. The S&P, Dow, and Nasdaq each logged new highs adding roughly 1% each during the week ended January 19. In the just 13 trading days since the New Year began, the 3 major indexes are all up between +4.8% and +5.3%; a pace that if sustained would result in a full year climb of more than +170%! It seems less than a bold call to offer that the current pace of upward progress enjoyed over that short span should be expected to moderate. Careful, such a prognostication does not mean doom or gloom or that a correction is imminent, even though it has been an extraordinarily long stretch tallying 400 trading days since US markets experienced a -5% setback.

From a fundamentals perspective, a big media focus last week was the impasse over the debt ceiling and threat of a government shutdown going into the weekend. Most market strategists pinned the odds of a shutdown as remote, but also suggested that if that outcome were to occur the market implications would be minimal so long as the event remains relatively short in duration. More important in both the short and intermediate term for investors however is the economic and corporate data. And on that score, the prints so far in 2018 are supportive. Corporate earnings and estimates of future periods continue to enjoy upward revisions on the back of tax cuts being incorporated, stronger global growth, the slide in the US dollar (making foreign sourced profits and our goods to foreign markets more attractive), and higher oil prices. And while the approval rating of our US president sits at abysmal low levels, a recent poll by the WSJ and NBC over the weekend reported that Americans satisfaction with the economy has reached a 17-year high. Interesting divergence. Maybe that is being driven by the number of companies reporting bonuses and pay increases in the past two weeks. Wage increases likely lead to a further uptick in consumer confidence in the near-term, but may also present the biggest identifiable risk to the markets if they ignite inflation that has otherwise been stubbornly low this recovery cycle (see other recent writings for why). Internationally, the economic picture also remains encouraging, and is at least partly deserving of credit for the overall improvement in tone over the last 12 months.

At the risk of becoming a broken record, we are encouraged by the steady upbeat tone of the financial markets. Yet we are highly conscious of the fact that it is difficult to recall a time when markets moved so calmly and persistently higher as enjoyed since mid-2016. Such low levels of price volatility are not normal and we are experiencing a slight increase in the number of client inquiries (such as should we buy more stock, or change to a more growth-oriented objective) suggestive that sentiment may indeed be getting complacent as VIX (volatility index, also known as a fear gauge) implied over much of 2017. While it is challenging to identify what will introduce a bit more uncertainty or anxiety into a market that is currently supported by a notion of investors to buy-any-dip (or blip), it is precisely these environments where something seemingly small can quickly become a big deal. It has been a long time since the market reminded its participants that they can go down, and a quick pop in volatility could spook many who have forgotten what that feels like. We continue to believe that the positive economic cycle still has fuel in its tank, but a moderation if not an outright giveback in returns is overdue on the path to a positive full-year experience. In that regard, we continue to advocate that individuals take care to reflect on the reason why they are invested as-is (stock/bond mix and diversification employed). Examine if anything in the framework of your time horizon and purpose of money has changed, meriting a more aggressive (or conservative) posture is appropriate or not. Looking at investing that way, helps remove emotion and fear of missing out, from the equation and improves your chances of long-term success.

Posted in Blog Post.