November Market Commentary

With the stock market at its current level, a recurring question many investors have is when will we reach the top, or are we there already? In answer to this question, we believe the market will continue to climb. Consumer confidence continues to be strong and the data can be validated across multiple data sources, like the level of voluntary separation from employment (which is at levels not seen since the early 2000's), the savings rate (which has dropped, typically indicating a higher level of confidence in the economy and in one's ability to earn money), and survey data showing small business optimism to be near its 30 year high. Also, the Philadelphia Fed's survey of Future Capital Expenditures recently hit its 30 year high, indicating business leaders continue to expect expansion.1

Even more interesting (and encouraging) to us, is it appears the market may have gotten here while taking a path of lower risk than in previous cycles. US corporations are currently operating at historically low levels of corporate debt to profits.1 High levels of debt to profits increase a business's financial risk, and therefore make the business more sensitive to economic forces (especially negative ones). Perhaps the relatively low levels of debt to profits are why the market didn't skip a beat during the earnings recession that began in Q3 of 2015 and ended in Q4 of 2016. This may also help explain the historically low levels of volatility.

We would further point out that many times markets reach their peak when investors are no longer rational about their investments. Examples of this are the valuation and expectations for tech stocks in the late 1990's, for oil stocks in 2007, and for housing and bank stocks in 2008. The expectations of these sectors drove them to unreasonably high valuations (bubbles), paving the way for a prolonged market correction (recession and bear market). Today's market, in our opinion, looks very different from what it looked like during the Tech Bubble, Oil Bubble, or the Housing Bubble.

To give some historical context, at the peak of the tech bubble, Microsoft traded at 254% of its current Price to Earnings ratio. Intel traded at 1,140% of its current Price to Earnings ratio, and Cisco traded at 1,266% of its current Price to Earnings ratio.1 In bank stocks prior to the bursting of the debt bubble, we saw large increases in leverage. Two examples of large US banks that were levered up are Bank of America and Wells Fargo. Bank of America's leverage (debt to total capital) prior to the bursting of the housing bubble was 136% of its current value, and Wells Fargo's peaked out at 121% of today's current leverage ratio.1 In energy, we saw strong earnings growth fueled predominantly by oil reaching prices of $140 per barrel (an increase that was not well explained by demand, growth or supply). When the price of oil came back to fair value (the oil bubble burst), so fell the price of the oil companies.

Returning to where we started, we don't see today's market as a highly over-valued market. Leverage ratios look reasonable, commodity prices look fair, and price multiples in relation to earnings and assets appear to be rational; and because we expect to experience synchronized global growth, we believe equities have the opportunity to climb higher. We've heard numerous times, "This bull market is the most hated bull market of all time," and we're inclined to agree. That doesn't mean that it's not a legitimate bull market. And by removing emotional factors and focusing on fundamentals, we believe investors can get a better view of the opportunities and risks in the market. We continue to monitor the markets and watch for shifts in fundamental data and investor sentiment.

1. Source: Thomson DataStream

 


 

Categories: Monthly Market Commentary

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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