“We have nothing to fear but the lack of fear itself.” – Walter Deemer
Hi everyone,
Earlier this month, the Nasdaq 100 had been higher for nine straight days, tied for the longest streak in the last four years. The semiconductor index had been up eight straight days, tied for the longest winning streak in nearly eight years. The largest “dip” in the S&P 500 since April has been a paltry 3.3%. The economy has held up better than most have expected in the face of tariffs, declining job growth, and inflation which has remained stubbornly sticky above the Federal Reserve’s 2% target.
Most client accounts are up low-to-mid double digits in percentage terms for the year, which is always nice, but I feel complacency starting to creep in. It’s tough to diagnose, but the assumption things are going just fine and look as though they will remain positive for the foreseeable future is dangerous. I like to say that it’s always the car you don’t see that crashes into you. In that same vein, I’d like to take the opportunity to focus on a few vehicles that might be hiding in our blind spot.
- Things are good, but to us, that means they can’t get much better. Currently 65% of NYSE stocks are above their 200-day moving averages. It’s a great time to be fully invested, but over the last 5 years, that number tops out around 70% before things change. (tip of the cap to Kevin Gordon, Schwab Senior Investment Strategist)
2. Serious credit card delinquencies (unpaid balances for at least 90 days) are at their highest levels in 14 years.
3. The S&P 500 is now trading at 3.3x revenues, its highest valuation in history. This is just one metric to show valuation, but even if we look at Price to Earnings (P/E ratio), we’re currently at 23 times earnings. In every single case in stock market history, the 10-year annualized return over the next 10 years has been between +2% and -2% per year.
4. The S&P 500 has traded more than two standard deviations above its 50-day moving average for the first time since December. As you can see from the chart below, ideally you would be to be lightening up in the red areas and adding to market exposure in the green areas.
As you know, our company line over the past 7-8 years has mostly been the traditional stuff you will hear from any financial advisor. Stay the course. Stay fully invested. Time in the market always beats timing the market.
While all of this is true, and none of the information above is a crystal ball about WHEN the market will start caring about the weakening economic picture, history does tell us we should be preparing more for a decline than a melt-up.
If you’re someone who is close to retirement, someone who would like to lighten up and get a little more defensive, or just someone who is willing to forgo some upside after a great 8.5 months with the chances of having a little more cash to deploy if/when things start to go sideways, now is the time.
We will be reaching out to everyone individually, but feel free to reach out to us as well. We believe the risk/reward of investing at these levels is a coin-flip, at best, and caution remains warranted.
I’ll leave with a quote from the movie Spy Game. It’s a 2001 movie starring Brad Pitt and Robert Redford (RIP). They are both CIA operatives, and at one point in the movie, Redford turns to his assistant and asks, “When did Noah build the Ark?”. She shrugs, as he says, “Before the rain”.
– Adam