August was a choppy, but essentially flat month for the markets. The price return of the S&P 500 was -0.19%, the Dow Jones Industrial Average was -0.07%, and the Nasdaq’s price return was 1.59%. The Barclays Aggregate Bond Index was up about 0.67%. As for volatility in the markets, the VIX hit its year-to-date high on August 11th, climbing nearly 70% higher than where it started the month. Much of the increase in the VIX can be attributed to the tensions with North Korea, and certainly some of it seemed to revolve around headlines including President Trump. However, we also saw more market-centric headlines like “Deflating Nasdaq breadth may be a sign of exhaustion (Reuters).”
As we’ve written earlier this year, some sectors of the equity market appear to be getting over-valued, and the sensitivity of high growth stocks to negative news and reporting can cause a quick, dramatic fall in those stock’s price. Some current examples this year are Tesla’s 14.6% drop from June 30 to July 6, Netflix’s drop of 8.7% from June 8 to June 12, and NVIDIA’s drop of 12.6% from June 21 to July 3.
The question we ask ourselves is, “When will the party stop?” We rely upon various sources of economic and market data to help answer this question. Understanding that the U.S. economy is a Consumer Driven economy, we look to see how consumers feel. In reviewing the last 30 years of history, it is unexpected to see a prolonged drop in U.S. equities without a meaningful drop in Consumer Confidence. With the increase in consumer confidence over the last year, we don’t anticipate a prolonged market selloff at this point.
Additionally, over the last year the S&P 500’s operating earnings increased by 12%, and its revenue growth over the last quarter was up 5.1%. While these numbers can be somewhat volatile, with higher consumer confidence, and relatively strong levels of business confidence, we believe the market’s value remains fair. We’ve also been tracking Capital Expenditures for a while and although they haven’t been great, they have been increasing. The increase in capital expenditures validates that business confidence looks to stay strong.
In our opinion, the answer to the question of when will the party end is not yet. However, virtually no one ever times the end of the market’s rally perfectly. We believe fitting your portfolio to your needs helps to greatly mitigate the risk of loss during a market selloff. For those who take more consistent distributions, this means lower risk equities with higher dividends and probably more fixed income as well. For those who are not, and will not be taking distributions for some time, a higher exposure to more volatile growth oriented stocks may be acceptable. The process of careful planning to meet your needs improves the probability of meeting your goals in the future.
Categories: Monthly Market Commentary