Welcome! We have a lot to cover, including a brief overview of the 1929 market crash, and what that means for us today.
The Fed’s monetary policy remains accommodative. Inflation is low, which allows the stock market to achieve all time new highs. The Federal Reserve announced their decision to initiate normalization of their balance in October. Under this quantitative tightening program, the Fed will gradually reduce the amount it reinvests in maturing securities. The US economy has now achieved two consecutive quarters with 3% or more growth. The last time this happened was 2011. There are no signs of a pending recession, and all portfolios remain fully invested.
What can we learn from the market crash of 1929 and today’s bull market?
Supposedly, Joseph P. Kennedy (1888-1969) knew that it was time to get out of the stock market in 1929 when his shoeshine boy began giving him stock tips.
Sir John Templeton (1912-2008) probably said it best about bull markets, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Unfortunately we will only recognize euphoria after the fact. This bull market began in March 2009. Typically a cyclical bull market survives only two to five years, but this one has lasted much longer perhaps due to the slow economic recovery, the Federal Reserve Bank’s Zero Interest Rate Policy from December 2008 until December 2015, the three rounds of quantitative easing from 2009 thru 2014, and the reduction in employee social security taxes from 6.2% to 4.2% in 2011 & 2012.
So what will stop a bull-market? Only a bear-market. What will start a bear-market? Broadly, only a recession (which might be predicted) or a geo-political event (which can not be predicted).
So what are investors to do? Good, broad advice for all investors is to construct a broadly diversified, low cost, and tax-efficient portfolio around your needs, objectives, risk tolerance, liquidity requirements, tax status, and time horizon. You can do this either on your own or with an advisor — preferably a fiduciary and not just an insurance agent or a stockbroker, both of whom are not required to put their client’s interest first.
The extraordinarily long bull market that began in March 2009 is entering its 104th month and has earned its place as a unique money making opportunity for investors as it moves towards its ninth anniversary. Since the March 9, 2009 S&P 500 Index closing low of 676.53, the index has increased 280%. In addition, the index has paid annual dividends of close to 2% — thereby producing total return of 297%. There are no signs of a recession going forward.
S&P 500 Index Operating Earnings & Potential Going Forward
We are maintaining our S&P 500 Index operating earnings estimate of $128 this year and $142 next year. Combining our estimate for 2018 with our price/earnings ratio range of 17 to 18 times, we expect the S&P 500 Index to trade into the mid to upper 2600s range going forward. The stock market has history of trading into “over-valued” territory during extended bull markets.
Recommended Action for Your Stock Portfolio
There are no changes to Lorenz Financial’s stock market portfolios. All portfolios are fully invested. The most recent stock market correction was in January and February 2016. We could have another correction at anytime. Our plan is to ride out any such correction as typically within three to six months of hitting a correction bottom, the market is well into a recovery.
The US economy posted its best six-month stretch of growth in three years despite two major hurricanes and major fires in California – a sign the economy might be breaking out of its long-running slow-growth trend. GDP grew during the 3rd quarter of 2017 at 3.0%. The data below shows the breadth of the growth.
The Association of American Railroads reported rail traffic increased 1.7% year over year (YOY) in September. The American Trucking Association Tonnage Index was up an impressive 7.4% YOY in September. The ports of Los Angeles, Long Beach, and Savannah report YOY container traffic has increased 8.2%, 8.9%, and 9.6% respectively in September.
This economic growth will likely encourage the Federal Reserve to raise the short-term Federal Funds rate a quarter of a percent during its December meeting.
The first $10B has rolled off the Fed’s balance sheet during October. Another $10B will roll off during both November and December. In January the target roll off will start at $20B per month. The Fed’s balance sheet totaled $4.43 trillion at the end of October.
As of October 31, US Treasuries are paying per year
- 2 Years @ 1.60%
- 5 Years @ 2.01%
- 10 Years @ 2.38%
- 30 Years @ 2.88%
The 10-year US Treasury has had a dramatic increase in yield since September 7, 2017 when its yield was 2.06%. Remember: as interest rates go up, existing bond prices go down.
The Fed’s preferred inflation gauge is the Personal Consumption Expenditure (PCE) price index. The Fed’s expectation for the PCE inflation rate is to end the year at 1.5 to 1.7%. The Fed’s long-term inflation target is 2%.
The Treasury markets show the following long-term annual inflation expectations.
- 5 Years at 1.79%
- 10 Years at 1.88%
- 30 Years at 1.96%
Recommended Action for Your Bond Portfolio
Our recommended bond market investments remain unchanged. We are investing only in short-term, investment-grade corporate bond funds, intermediate-term investment-grade corporate bond funds, and short-term, high-yield corporate bond funds. We are not recommending any long-term bonds or long-term bond funds.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Need help with your portfolio?
Lorenz Financial is ready to help you! Check out our resources page on our website for great finance tips and information, and contact us today to get started on planning your financial future!
Lorenz Financial Services, LLC is a West Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.