Fall is upon us! Stay informed about current market trends to make sure your portfolio is in shape going into quarter four.
The Feds’ monetary policy remains accommodative to supporting economic growth. Inflation is low, which allows the stock market to achieve higher than normal PE ratios. International stock market investing continues to outshine the US market. VTI, the total US stock market exchange traded fund index, has returned 11.12% through August 31. There are no signs of a pending recession, but it would be typical to have a mid-term, off-presidential election year bottom (see below). All portfolios remain fully invested.
The stock market has registered 14 consecutive mid-term, off-presidential election year bottoms since 1962. In every case, a significant stock market rally has followed the completion of the mid-term, off-presidential year bottoming process. These bottoms developed in three forms:
(1) Bear market declines of over 20% in years 1962, 1966, 1970, 1974, 1982 & 2002.
2) Major corrections of up to 20% in years 1978, 1990, 1998 & 2010.
3) Minor corrections of less than 10% in years 1986, 1994, 2006 & 2014.
These stock market bottoms have averaged 21.51% down from the recent high, but then a bull market began and averaged 27% up over the next 45 months. In the event a bear market sell signal develops, we will adopt a highly defensive approach to our stock market allocations.
S&P 500 Index Operating Earnings & Potential Going Forward
We are maintaining our 2017 S&P 500 Index operating earnings estimates of $130 and our 2018 estimate of $140. As of now, our 2018 estimate appears to be on the conservative side. Based on our ongoing price/earnings ratio range estimate of 17 to 18 in a low inflation environment, the S&P 500 Index has the potential to challenge the mid 2500’s range going forward, in our view. Current valuations remain far below the historically high levels reached early in year 2000 when the P/E ratio approached 30 on the S&P 500 operating earnings.
International Stock Market Investing
Except for the most conservative investors, a well-diversified portfolio will include international large-cap, mid-cap, and small-cap companies. As of August 31, 2017, EFA, a broad market-cap weighted exchange-traded fund across 21 developed countries, was up 17.78%. VTI, the total US stock market index was up 11.12% over the same timeframe. Lorenz Financial’s favorite small and mid cap international growth fund was up 27.17%. But of course this fund only averaged 3.47% per year over the previous 3 years so an international stock market investor must have courage and patience to wait for the great years.
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 any time. Our plan is to ride out any such correction as typically within 3-6 months of hitting its bottom, the market is back up to new highs.
The month of September will be filled with fiscal policy measures as Congress negotiates a stopgap-spending bill and a debt ceiling extension. The GDP grew during the first half of the year at 2.1% (1.2% in first quarter and 3.0% in second quarter). Our target for GDP growth in the second half is 3.1% or an average of 2.6% for the whole year.
Former Fed Chair Alan Greenspan has been in the media recently warning investors that real interest rates are too low and that we are in a bond bubble. He believes when the bond bubble ends, long-term rates will rise dramatically. We agree with Mr. Greenspan that interest rates are likely to rise over the next few years. As interest rates rise, bond prices will drop. Long-term bonds will drop more in price than intermediate-term bonds. Intermediate-term bonds will drop more in price than short-term bonds.
US Treasuries are currently paying:
- 2 Year – 1.35%
- 5 Year – 1.73%
- 10 Year – 2.16%
- 30 Year – 2.77%
The Feds’ preferred inflation gauge is the Personal Consumption Expenditure (PCE) price index. The most recent data shows the PCE inflation rate was 1.4% year over year. The core PCE index, which excludes food and energy, was also at 1.4% year over year.
The Treasury markets show the following long-term inflation expectations:
- 5 year – 1.58%
- 10 year – 1.76%
- 30 year – 1.86%
Recommended Action for Your Bond Portfolio
Our recommended bond market investments remain unchanged. We are investing only in short-term corporate investment-grade funds, intermediate-term corporate investment-grade funds and short-term corporate high-yield funds. We are not recommending any long-term bonds or bond funds.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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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.