Up, Up, and Away!
Investment clients will find October reports posted to the Morningstar portal today.
The stock market has now set a new record of 12 straight months without recording a monthly loss. Meanwhile the S&P 500 is extending what is already its longest ever streak of days without experiencing a 3% correction. There have only been about 4 days this year in which the S&P 500 has fallen by more than 1%, something which should occur several times as driving the market? We are well past any “Trump bump” or the like. I believe the market is somewhat skeptical at this point that much meaningful change will come out of Washington. Instead what is driving stocks higher is consistently good (but not too good) economic news. Just as I can barely remember the last time we had a bad day in the markets, I can’t remember the last time a piece of economic news came in below expectations. Growth has picked up to 3% in the most recent quarter – a very healthy gain. Other countries are starting to recover as well, with the European economy showing signs of life, as well as Asia.
The most recent jobs report released today came out strong with the lowest unemployment rate since 2000 – but with little sign of wage increases. Lack of wage growth may not be good for employees, but it does reduce fears that inflation is picking up. As we get further along in the recovery, inflation becomes the biggest single threat to the market, as inflation will force interest rates higher. Inflation and higher interest rates
So the economy continues to provide support to stock prices. That said, stocks have become expensive. And balloons (like bubbles) are prone to pop when they float too high! Current prices are based on some pretty rosy expectations. It is quite normal and prudent to become a little wary as the stock market enters YEAR 9 in one of the longest bull markets of all time. Almost all market traders now are expecting an imminent correction of some kind. Most see 5-10% corrections as healthy for markets, forcing participants to reconsider their assumptions. However, the market defies those expectations, month after stable month.
Should investors "do something" in response to the stock rally? If you are prudently diversified in a portfolio designed for your long term needs, then there is nothing you need to do. If you haven't rebalanced your portfolio in a while, this might be a fine time to do so. Many people find that after a long rally, their allocation to stocks may have grown higher than they intended. Rebalancing forces you to sell some of those stocks, while buying positions which have lagged. After all, those laggards may very well be tomorrow's leaders!
Our strategies once again enjoyed positive gains on the month, albeit not as robust as the stock market. This is to be expected due to the risk managed nature of our portfolio strategies. As would be expected given the investment climate, growth portfolios turned in the strongest gains, while income oriented portfolios generated lower – but still respectable – monthly returns.
We believe it remains prudent to be well diversified and to own strategies which can provide buoyancy to a portfolio during times of crisis. While such strategies may dampen returns during periods of stock market exuberance, over the long run they will boost returns by reducing losses during the next bear market. Believe it or not, that WILL happen. Meanwhile, I keep pinching myself and asking if this market is truly for real, and when will I wake up!
Past performance is not indicative of future results. Diversification may reduce, but will not eliminate risk of loss.