In the UK, when you cross the street, there are friendly reminders to “look right” printed on the edge of the road. The message is to pay attention, but in a direction many of us are not accustomed to looking. Here in the US, in the world of financial assets, the implicit message today is to “look up”. While some may think of prayer, I’m not heading in that direction. As much as any time in recent memory, the imperative today is to keep a sharp watch on the horizon.
Stock prices, measured by the S&P 500, advanced again, 1.9% for the month of September, and are now up a cumulative 14.2% year to date. It’s been steady going for share prices of US stocks, with March the only down month this year, and then a mere -0.04%. According to The Bespoke Report, there have been only 8 days this year when the S&P 500 has moved +/- 1%, with only 1963, 1964 and 1972 recording fewer days. We are deep into a long-running bull market, and at the moment, there are few signs the trend is about to turn.
From a behavioral perspective, it is clear investors are beginning to be lulled in. While there is no specific reason to believe the slope of the uptrend is about to change, some baseline prudence at this point is warranted. Anecdotally, we’re coming up on the 30th anniversary of the October 1987 crash – a point in time I remember well. My concern now is our collective complacency is creating the foundation for people to own a greater percentage of stocks than they would otherwise be comfortable owning.
To be clear, the fundamentals look reasonable. 2Q GDP figures were recently revised to 3.1%. The US is in the 9th year of an economic expansion. It is likely growth can continue in spite of the damage inflicted by hurricanes in Florida and Texas and forest fires in California. It is also hard to foresee higher growth than what we now have without a change in access to labor. Unemployment, in the 4.4% range, is the lowest since 1960s. Importantly, inflation is not apparent, yet. The issue here again, is labor. The job market is becoming tight and it seems like wage inflation is inevitable.
US 3Q earnings are just beginning to be reported. Expectations are for results better than analysts’ have projected. The earnings beats will likely be attributed to several things: an unusual period of synchronized global growth, stable oil prices and improved US output, a “constructive” upward shift in the yield curve, and the low value of the US dollar.
I expect a continued resurgence in corporate earnings to support stock prices through 4Q 17 and likely into 1Q 18. There has been speculation that corporate earnings would benefit from a realignment of the tax code. In light of the recent disarray in Washington, it seems highly unlikely any real progress will be made. There is no doubt a repatriation tax holiday would be a tail-wind, but I do not think the market expects it, and will shrug off one more disappointment as more of the “new normal”. In my opinion, we will see no fiscal stimulus, modest growth and increasing (but not debilitating) inflation.
There is a good argument the most significant risk the markets face is geo-political. This is a category of market risk that is in many ways not there, until suddenly it is. So much takes place out of the public eye, surprises (market shocks) can stem from this largely indirect factor. The greatest effect is the undermining of investor confidence due to extreme price volatility.
In this vein, a clear concern, fanned by the Equifax hack, is both the security of our personal data in an information driven world, and the ongoing attempts to manipulate popular media. There appears to have been a well-orchestrated, and highly effective campaign by state sponsored Russian hackers to influence popular opinion in the US. My primary concern is whether the foundation of our democratic process has been compromised.
Harking back to our communication last month, if you have not frozen your credit, please do so. We can send you instructions to put a freeze in place. This time of year, we are busy reviewing portfolios for the year end. We want to be tax prepared. If we have not spoken recently, or if you would like to arrange a review, please do not hesitate to reach out.
Bruce Hotaling, CFA