Where We Stand - For Now

March 2017

“Change is the only constant in life.” - Heraclitus

Some say the markets are fickle, that they tend to move randomly up or down on some short-term event, be it real or fake news (sorry – couldn’t resist!). But to us, the market’s seemingly bi-polar rhythm makes sense; at the end of the day, the market is simply a bunch of human beings voting on what they think may or may not happen in the future. And we human beings tend to be an emotional bunch, where “fickle” may be the nicest way of saying that we are constantly changing our vision and judgment of the world, especially since things – be it relationships, technology, politics, or what have you – keep changing. So with that being said, we want to lay out our vision of where the economy and markets stand, knowing that the one constant in life is change.
Let’s start with interest rates since the Federal Reserve just saw fit to increase their benchmark fed funds rate by another 25 basis points (.25%). Fortunately, for the stock market it seems, the Fed also indicated that they only see another two increases this year and that they would be slow and methodical in the increase. Make no mistake, however, the Fed did express confidence in the U.S. economy, and the markets should obviously take heart in that too.
As for the stock market, we simply believe it’s overvalued relative to historic averages. In fact, the price-earnings ratio (PE) for the S&P 500 is over 19 based on the trailing four quarters, and the post-1980 average is 16.4 (LPL Research). Further, the cyclically adjusted PE ratio, otherwise known as CAPE, which measures an inflation adjusted ten-year average, currently stands at 29.8 as of March 16, which is 78.4% higher than the historical mean of 16.7 (GuruFocus.com). But please remember two things: first, just because a market, be it stock or bond, is overvalued, does not mean it is going to go down. Second, when taken in light of current circumstances, such as historically low interest rates and inflation, these above-average numbers become more rational (although the cynic in me always cautions not to “rationalize” too much).
Speaking of irrational, policy risk is another potential problem. Politicians on both sides of the aisle have stepped up their partisan attacks to once again create deadlock (which has actually seemed to benefit the markets in the past). The problem with this type of situation now, however, is that there is already a lot of good news and optimism built into the markets; should there be a substantial delay in issues that have bipartisan support, such as tax reform and health care, the resulting disappointment could cause the negative tail to wag the dog (and yes, ironically enough, we do believe there’s bipartisan support for health care reform since the Republicans want to repeal/replace Obamacare, and its namesake and some Democrats indicate the current program could be improved).
As for global policy risk, although emerging and developed countries seem to be on better ground, there remains some protectionist uncertainty, if you will. For example, countries such as France and Germany are dealing with populist movements that are not dissimilar to what has happened in the United States and Britain. In our opinion, although there may be some inadvertent disadvantages to a global economy, reality dictates that the globalization genie simply cannot and will not be put back into the bottle.
So, why are we actually optimistic for the U.S. economy? Simple, the conditions that usually precede a recession still do not exist in our purview. We have not seen discouraging reports on any of the “overs”, as LPL Research calls it, that cause us to expect a recession. We have not seen evidence of over-borrowing or over-spending. Sure, we think the real estate market is possibly in a bubble, just as the stock market is overvalued, but we also know that markets move to extremes – meaning that they can both continue to inflate for a good while (weeks, months, years?) even though they may be overvalued. Further, if - or rather when – a market corrects, as painful as these adjustments may seem at the time, they are actually very healthy for the long term.
As for the last “over”, over-confidence, I’d say it’s about 50-50. According to some this is “the most hated [equity] bull market ever” (according to Gary Fullam, chief investment officer at Globalt Investments). On the other hand, we hear lots of stories about people trading stocks for glory again, and in our humble opinion greed tends to go hand-in-hand with an increase in speculative stock trading (remember, when times and people are fearful, don’t forget the upside; when times and people are greedy, don’t forget the downside). So, to reiterate, we see a good amount of ambivalence in the face of a strong equity market as well as a persistent, for lack of a better word, economy – one that will hopefully continue to be reflected in the stock market.
Either way, I can promise you two things (and trust me, in this industry promises and guarantees are, and should be, rare things indeed!): one, that we will always seek to advise you on your financial affairs while being cognizant of what can go right and what can go wrong. And two, that no matter how much planning you do, there will always be a need for consistent vigilance and potential adjustment, knowing that the one constant in life is change.
Have a great start to Spring (on March 20th), and thank you for your friendship and trust!

R. Timothy Curran, JD, CFP®

tcurran@lpl.com Direct 704.499-9703

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual


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