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Archive for July 2017

Strong, Quiet Markets – Don’t Get Complacent

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The Current Bull Market – The Late Innings

We just celebrated the eighth anniversary of this bull market. It seems like yesterday, but on March 6, 2009, the Dow Jones Industrial Average sank to 6,443.27. As of July 13, 2017, the DJIA closed at 21,553.09, an all-time high.

This is a testament to the resilience and power of our stock market and economy over time.

We are also experiencing low volatility. As measured by the CBOE Volatility Index (or VIX), volatility reached a low not seen since February 2007. The one-month implied volatility on the S&P 500 fell to the lowest on record, according to Bloomberg.

In addition to high stock prices and low volatility, the U.S. economy is performing well. We are officially at full employment. Inflation remains below 2%. GDP growth is tepid, but steady. Corporate earnings have been strong of late.

Even international equity markets are performing well, although some of that performance is explained by a temporary weakening of the U.S. dollar.

Yields in the U.S. bond market remain at historic lows. The 10-year U.S. treasury bond currently yields 2.34%. Current corporate bond yields are just below 4.00%.

In response to these strong economic conditions, the Federal Reserve announced another quarter-point increase to the federal funds rate in June, its second increase in 2017 and fourth overall since it began tightening last year. The Fed has also started to unwind its quantitative easing program by selling some of the bonds it bought in the past few years. The process of selling bonds puts upward pressure on rates. The process of shrinking the Fed’s balance sheet will take years.

Don’t Get Complacent

Good stock market returns combined with low volatility make investing seem easy. It’s a recipe for investor complacency, and that is a dangerous thing.

As far as I know, no one has abolished the business cycle; we just haven’t seen one in a while. There will be future corrections, bear markets and recessions. You can count on it.

A consensus of economic forecasters puts the odds of a U.S. recession at one in eight this year and one in four next year. Epstein, Gene. “Predicting the Next Recession.” Barrons at p. 25, July 17, 2017. Of course, the economist John Kenneth Galbraith once famously said, “The only function of economic forecasting is to make astrology look respectable.”

How long will this bull market last? No one knows for sure (and you should be very skeptical of anyone who says they do know). It may last three more days or three more years. What we do know is that we are 101 months into the current bull market, the second longest on record since WWII.

What Not to Do

When markets are strong and quiet, some investors feel emboldened. Investing seems easy, and they don’t want to miss out on “easy money.” They typically buy more stock, even taking the occasional flyer on a tech company with excellent growth prospects. Historically, these are signs of a market top. When markets turn, these investors have taken too much risk and they experience heavy losses on the way down.

Other investors go the opposite route. They will try to time the top of the market and sell investments to generate cash or try their hand at shorting the market. It all depends on timing. If their timing is good and the market tops out, they can pat themselves on the back. If there are three more years to go in this bull market, they will miss out on returns, which can be very frustrating.

Currently, our political beliefs and attitudes are important factors in our personal outlook. Some investors believe the economy is a coiled spring just waiting to pop when the “Trump Trade” finally arrives (i.e., tax cuts, infrastructure spending and lower regulation). These investors are bullish.

Other investors are worried about what they see going on in the White House. They believe things are about to take a turn for the worse. These investors are bearish.

Regardless, most investors will do nothing. But since stocks have been on a run since the election, their stock allocations are well above target. Their asset allocations are drifting over time, taking on more and more risk.

What to Do

Rebalance back to your target allocation. For most investors, this will mean selling appreciated stocks and redeploying that capital into other asset classes, like bonds. As long as your underlying allocation is sound, this is the best course of action in the face of uncertainly. At the very least, check your current allocation and compare it with your target allocation.

If you are like most investors, it’s difficult to see your overall asset allocation because you have numerous accounts at various custodians. You may have a 401(k) at your current employer and even one at your previous job. You may have an IRA at one custodian and a brokerage account at another custodian. You may have a money market account or a CD at a bank and a checking account at another bank. You have assets scattered all over the place.

This is typical. But when you have multiple 401(k) providers, custodians and banks, it is difficult to aggregate these accounts to see what your overall investment allocation looks like. This is why I typically advise clients to consolidate all their investment accounts with one custodian. This makes matters much simpler. Of course, you cannot move your current 401(k) because the location of that account is usually determined by your employer, but you should roll over old 401(k) assets into an IRA at your primary custodian.

With respect to your current 401(k), it is helpful to set that allocation separately. Your 401(k) probably has an automatic rebalancing feature that will help you stay on target over time.

If you cannot see your overall allocation, you should seek assistance from a good advisor so you can. Otherwise, how can you determine when you need to rebalance? Of course, this assumes you have your allocation set correctly given your long-term objectives and risk tolerance, and you have deployed your investments in a tax-efficient manner.

Having a good asset allocation and rebalancing it correctly are critical to your success as an investor, and this is where most investors fall short.

Be prepared for changing market conditions . . .

If you have questions or concerns about your situation, please give us a call at (855) 353-3800.

Thank you,

Austin Lewis

This is an educational newsletter expressing opinions only. This newsletter should not be relied upon until your individual situation is taken into consideration by an experienced advisor. This newsletter is not designed or intended to give you individual investment, tax, or legal advice. We strongly recommend that you consult with your own financial/tax advisor and/or legal counsel for information and advice concerning your particular situation. If you are a client, please give us a call. Past performance does not indicate or guarantee future results. Investing involves risks, including loss of principal.

Source of charts: Dimensional Fund Advisors. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

 

Written by Lewis Wealth Management

July 19, 2017 at 10:30 am

Posted in Uncategorized