The 23 year-old CEO of Snapchat, a 2 year-old company with no revenue, recently passed on a $3 billion buyout offer from Facebook. Terms like “bitcoin” and “crowdfunding” are finding their way into the investment lexicon. Twitter made a spectacular debut in its IPO and a startup company called Fantex is touting an investment vehicle that allows fans to support the careers of NFL players in exchange for a cut of future earnings.
As we study current market trends and discuss the situation with clients, the word that seems to popup regularly these days is “frothy.”
We’ve basically recovered from the 2008-2009 bear market and some indexes and stocks are starting to hit new highs. Given this, we thought it would be a good idea to share our thoughts on current overall market conditions.
Even though US equity markets have had a solid year, very few other asset classes are following along. Europe is starting to do better (we feel they are a few years behind the US) but emerging markets are lagging along with metals and commodities. We’ve noted in the past that the bond market is probably near the high of a 30 year cycle.
The US is probably fairly valued right now. A few years ago, investors realized the world wasn’t actually going to end and money started flowing back into US stocks raising them from the depressed valuations of the Great Recession to today’s higher, but not excessive, levels. Recently, we’ve seen a sentiment shift to one where investors are now starting to see that the economy and corporate earnings could indeed continue to grow for several more years.
It’s one of the oldest clichés in the book but we need to repeat that the market does indeed climb a wall or worry. As financial advisors, we’ve seen this happen over and over again. The 2008 crisis hit everyone hard but things are getting better and we feel it’s critical to push cautiously forward.
We disagree with the idea that the market’s recovery is only a result of government intervention in the economy through the QE programs. We’ve shown that in our opinion, these programs really didn’t get much money actually flowing in the economy. They acted more as a backstop and allowed bankers and investors to proceed with credit transactions knowing there was support if needed. Given this, the removal of these programs may be psychologically difficult for the market but the economy looks like it can start to stand on its own two feet again.
We find the following graphic useful when trying to determine where we might be in a particular cycle. It does not have specific numbers on the axes but it does serve as a good model.
In our opinion, we are probably somewhere in the “media attention” phase where the public is just starting to get involved. This may strike some as a strange statement given the media’s continuing obsession with the “bubble” meme. We would note, however, that a recent survey done by BlackRock shows that many investors are still heavily in cash. It showed that US investors were 48% in cash and only 18% in stocks.
We feel that things have improved but we don’t think a mania phase has set in just yet. Given the rapid gains we saw in the US markets this year, we would not be at all surprised to see a pullback of 10% or more. Trees don’t grow to the sky and at some point this will probably happen. In such a situation we would look to add assets to client portfolios. In other words, we don’t think the next big pullback will be a cause for panic.
The “B” word has started to make the rounds again. People are starting to ask if we are once again in a bubble. We feel this quote from Andrew Bary of Barron’s does a good job of summarizing our feelings on this matter:
“Is there a bubble? Undeniably, there are few of them – in some areas of tech and in the IPO market. Also, some credit bubbles in terms of who can get debt financed at what price. But the entire marketplace or economy is not one giant bubble, as the Prophets of Doom will have you believe. Today’s Tech and IPO bubbles are symptoms of the economic improvement this time around – people feeling good about the future – but they are not the drivers of it.”
Lastly, please don’t construe our opinion as anything more than guarded optimism. We are very aware of the many risks, both known and unknown, in the markets that can quickly derail any investment strategy. We continue to use a series of strategies to reduce risk as much as we can in client portfolios.
The Takeaways:
• Our Plow Horse economy continues to trudge slowly forward. It sometimes misses a step but it seems to regain its footing when this happens. This growth continues to be reflected in improved corporate earnings.
• With the Dow Industrial Average and the S&P 500 Index near all-time highs, it’s normal to worry about bubbles and frothy markets but so far, the merchants of Doom and Gloom have not seen things go their way. We are constantly on the lookout for the next big slip-up in the markets or the economy but we feel it’s important to take advantage of current favorable market conditions.
• We feel that the continual stream of good news and bad news will continue. At some point the bears will be right and we’ll get a pullback in the markets which will scare people away. As we see things right now, this will probably be a good time to add to holdings rather than to sell.
Jeff and Ken – Orlando Financial Advisors
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