Putting Investors Market Anxiety In Perspective

We recently ran across on article on wealthmanagement.com that we thought would be timely. They, as have we, observed and increase in concern over the stock market's value (we've also encountered this concern in relation to the bond market).

"Lately, we have seen an uptick in investors who express concern that stock valuations are overheated and could soon spill into bubble territory. This is predictable, thanks to markets surpassing one benchmark after another in recent months—a surge that, more or less, follows a sustained, eight-year rise in equities in the wake of the financial crisis.

Reinforcing this sense of unease are market pundits, talking heads and other so-called financial experts touting their theories on financial news networks of why the other shoe is finally about to drop, including increased tensions with North Korea or the tense domestic political environment. Another popular view is that today’s environment is similar to the conditions that prevailed in early 2000, just before the floor fell out of the Nasdaq and the dot-com bubble burst.

Doomsday scenarios may drive ratings for CNBC and other print and online publications, but they typically lack important context. Still, it’s easy to understand why some investors can become unnerved, especially those who are nearing or are in retirement. The following are four must-have thoughts to assuage investors’ fears about today’s market environment:

  1. An index is just a number. Earlier this year, as the Dow crept toward 20,000, the financial news networks breathlessly reported each incremental rise as if it were breaking news. When the 20,000-point barrier was finally broken, it was framed as a celebratory event. The truth is, it was hardly an event at all. Despite this hysteria, the level of the Dow, the S&P or any other index is virtually meaningless, revealing almost nothing about whether individual stocks are "too expensive." About the only thing we can glean from "Dow 20,000" (or "Dow 21,000" or "22,000," for that matter) is that the bull market is still on.
  2. Bull markets do not die of old age. Picking up on the above, when some investors hear the Dow or another index has eclipsed an ostensibly important milestone, their primary emotion is not elation, it’s fear. In their mind, that’s a sign that stocks are too frothy and a drop-off is imminent. There are a number of reasons why bull markets falter, please understand that old age and high valuations alone are not among them. Remember, valuations were high in 2004, but that didn’t stop markets from continuing to rise. In fact, from December 2004 to November 2007, the S&P gained 35 percent, or just under 12 percent a year.
  3. Market corrections are standard. We cannot emphasize enough that corrections are a normal occurrence—and, in fact, may help fuel longer-term expansions through a process of depressurization. From the beginning of 1980 to March of this year, the average intra-year drop in the S&P was 14.1 percent. Even so, markets made annual gains 75 percent of the time over that stretch. Corrections are an unavoidable reality of having exposure to equities, even as it’s impossible to know for sure when they will come or how quickly they will materialize. More importantly, when a correction does occur, panicking is a waste of energy, since your financial plan should take into account such occurrences.
  4. Context is important. Much has been made of the fact that economic growth both in the U.S. and across the globe remains relatively sluggish. As a result, many pundits have touted the idea that markets can’t possibly sustain their current levels, let alone rise. But we’re in a new normal globally, where low-growth levels justify accommodative central-bank policies. The past, therefore, has very little in common with today’s dynamics, and within this context it’s easy to see how the economy could continue to expand and support further advances in the equities markets.

In the aftermath of the financial crisis, concerns are now about the market being too good. That is precisely the fear today among many investors, whose outlook is basically, "This can’t possibly last." And maybe it can’t. After all, ebbs and flows are a part of investing. September and early October are traditionally more volatile times in the markets. If there is a pullback in the next month or so we would view that as normal seasonal volatility."

Unless the fundamentals of the overall economy change dramatically, we do not see any signs of a long or protracted pull back in the market in the next 12 to 18 months and would view market weakness as a buying opportunity.

Please feel free to call us at 760-206-8500 or email us if you have any questions or we can be of any service.

 


 

Fortem Financial 2017. All rights reserved. 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. Carefully consider investment objectives, risk factors and charges and expenses before investing.

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.

August Market Commentary

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.

 


 

Fortem Financial 2017. All rights reserved. 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. Carefully consider investment objectives, risk factors and charges and expenses before investing.

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.

Categories: Monthly Market Commentary

August was a relatively quiet month despite North Korea and Hurricane Harvey

Our hearts go out to the families affected by the devastation of Hurricane Harvey. The American spirit is alive and well as was demonstrated to us in last week’s search and rescue of the flooded areas. We wish all of our neighbors in Texas and Louisiana a speedy recovery.

Stocks rose last week on generally upbeat economic data and elevated expectations for tax reform, even as Hurricane Harvey inflicted major damage throughout Texas and Louisiana (more on this below). The September employment report showed continued job creation, though the gains were at the low end of analysts’ expectations; hourly earnings (+0.1%) rose less than expected and a 0.1% increase in the unemployment rate was also somewhat disappointing. Yet, other economic data were broadly positive: the revised estimate for second quarter GDP growth increased to +3.0%; consumer confidence continued to strengthen; and, manufacturing sector growth accelerated. Furthermore, increased industrial activity in China and Europe reflect growth in both domestic spending and exports. Meanwhile, the dollar has weakened 11% year-to-date against the euro; the pullback should benefit earnings for companies with foreign operations, while also helping to increase tourism-related spending in the U.S. This week, the White House began the drive for tax reform. While lacking specifics, early efforts may focus on lowering the corporate tax rate which would improve the competitiveness of U.S. businesses. Tax reform is high on the list of priorities as Congress reconvenes next week. Finally, North Korea’s launch on Tuesday of a missile, which traveled over Japan, continued the country’s show of force. Investors, though, seem disinterested; the CBOE Volatility Index (VIX) declined to levels preceding the escalation in tensions.

Source: Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

 

Market Week

Hurricane Harvey will go down as one of the worst natural disasters in U.S. history, with severe flooding and catastrophic damage to homes, businesses, and infrastructure throughout the region. Moreover, the Gulf Coast is home to a substantial portion of U.S. refining capacity; gasoline prices across the nation have jumped due to the forced closure of many refineries. Estimates of storm-related losses, which currently range from $30 billion to $100 billion, make it the most costly natural disaster of the past 40 years. However, the post-disaster recovery will provide a regional economic resurgence as construction and replacement activities begin. Likewise, the disruptions for companies with significant operations in the affected areas will impact sales and profits for the third quarter; and yet, many of these companies may benefit over time. Examples of such businesses include: car dealerships, furniture and appliances retailers, industrial maintenance companies, and construction and engineering firms. Also, the tremendous effort to rebuild these communities should generate increased demand for labor along with higher wages which would, in turn, support service-oriented industries such as restaurants and retailers. These secondary effects will begin to materialize as early as the fourth quarter and continue for some time.

For the markets, August was a relatively quiet month despite North Korea and Hurricane Harvey. As investors return from summer vacation, trading activity should increase through the end of the year. Market focus will return to legislative action, third quarter corporate earnings season, and management outlooks for 2018.

Source: Pacific Global Investment Management Company

 

 

Last Week's Headlines

  1. The latest report on the second-quarter gross domestic product proved to be very solid, as the GDP climbed to 3.0% — 0.4 percentage point higher than the first estimate. The first-quarter GDP increased 1.2%. Economic growth was led by increases in consumer spending, nonresidential (business) fixed investment, federal government spending, and private inventory investment. Downturns occurred in residential fixed investment, state and local government spending, and a deceleration in exports. Increased consumer spending could be related to weak price inflation. How the Fed views this information when it meets later this month could go a long way in determining whether interest rates are raised.
  2. The number of new hires took a step back in August with only 156,000 jobs added during the month. Job gains occurred in manufacturing, construction, professional and technical services, health care, and mining. Employment growth has averaged 176,000 per month thus far this year, down from the average monthly gain of 187,000 in 2016. The unemployment rate ticked up 0.1 percentage point to 4.4%. The labor force participation rate, at 62.9%, was unchanged in August and has shown little movement on net over the past year. The employment-population ratio, at 60.1%, was little changed over the month and thus far this year. The average workweek for all employees on private nonfarm payrolls declined by 0.1 hour to 34.4 hours in August. Average hourly earnings for all employees on private nonfarm payrolls rose by $0.03 to $26.39, after rising by $0.09 in July. Over the past 12 months, average hourly earnings have increased by $0.65, or 2.5%.
  3. Consumers' income and spending increased in July but not prices, according to the latest report from the Bureau of Economic Analysis. Personal (pre-tax) income increased $65.6 billion (0.4%) in July while disposable (after-tax) personal income (DPI) increased $39.6 billion (0.3%). Personal consumption expenditures (PCE) increased $44.7 billion (0.3%). Prices for consumer goods and services as measured by the PCE price index increased a marginal 0.1%, as did core (excluding food and energy) PCE.
  4. The international trade in goods deficit expanded to $65.1 billion in July, up $1.1 billion from $64.0 billion in June. Exports of goods for July were $127.1 billion, $1.6 billion less than June exports. Imports of goods for July were $192.2 billion, $0.5 billion less than June imports.
  5. According to the August survey from IHS Markit, manufacturing output was the weakest since June 2016. U.S. Manufacturing Purchasing Managers' Index™ (PMI™) registered 52.8 in August, down slightly from July's reading of 53.3. Since a reading over 50 signifies growth, manufacturing output grew in August, but at a slower pace than July's growth. The purchasing managers index from the Institute for Supply Management showed output increased last month. The August PMI® registered 58.8%, an increase of 2.5 percentage points from the July reading of 56.3%. The survey sample size for the purchasing managers' index of the ISM is generally smaller than the one used by Markit, which may explain discrepancies between the reports.
  6. The Conference Board Consumer Confidence Index® increased to 122.9 in August, up from July's reading of 120.0. Survey respondents were bullish on current economic conditions, while their short-term expectations were tepid. The Index of Consumer Sentiment from the University of Michigan's Surveys of Consumers increased from July's 93.4% to 96.9% in August.
  7. In the week ended August 26, the advance figure for initial claims for unemployment insurance was 236,000, an increase of 1,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 234,000 to 235,000. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended August 19 was 1,942,000, a decrease of 12,000 from the previous week's unrevised level of 1,954,000.

 

 

Eye on the Week Ahead

The Gulf region continues to recover from the effects of Hurricane Harvey. It will be several weeks before the economic impact of that devastating storm can be measured. July's report on international trade for goods and services is out this week. Last week's report showed that the goods trade deficit expanded in July. Despite efforts on the part of the current administration to control foreign trade, imports continue to expand at a faster rate than exports, pushing the trade deficit higher.

 


 

Fortem Financial 2017. All rights reserved. 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. Carefully consider investment objectives, risk factors and charges and expenses before investing.

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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