Q3 2017 Update on the Markets:

S & P 500 (Large US Stocks) +14.24%

Russell 2000 (Small US Stocks) +10.94%

FTSE All-World ex-US (International Stocks) +21.03%

Barclays US Aggregate (Bonds) +3.14%

October 1, 2017

And the Rally Continues

It’s getting to sound like a broken record, the slowly rising stock market that is. Investors seem to be very adept at tuning out “the noise” of Washington, North Korea, Catalonia, etc. Instead, they’re concentrating on the health of the global economy and corporate earnings. The S & P 500 stock index is up 14.24% year-to-date (including dividends). There are plenty of warnings from market experts, but the consensus seems to be that this will continue on. Are we close to the top? Let’s take a look at a few things that often signal a market top:

Popular Signals of a Bull Market Top

• Panic buying: This market has been more of a melt-up than a flurry of buying with sharp increases in prices. There are things to worry about and many major market prognosticators have been warning of a big drop in stocks.
• Heavy inflows into stocks: Investors pulled $30 billion from US stock funds in the 10 weeks ending on August 25 – the longest streak since 2004. However, international stock funds saw a $36 billion inflow during the same period. Bond funds continue to see strong buying.
• Rising interest rates: While the Fed is committed to increasing rates, they have repeatedly said that the pace will be slow and depend on inflation and the economy.
• Weakening corporate earnings: US corporations reported two consecutive quarters of double-digit profit growth for the first time since 2011. Hurricanes Harvey and Irma may have slowed earnings a bit, but most analysts expect corporations to report a solid third quarter.
• Thinning market leadership: While the indexes have been steadily rising, rotation under the surface has been changing the types of stocks in the lead. Tech, banks, energy are in now.
• Shift to defensive stocks: Most traditional defensive sectors like consumer staples (+5.6%), REITs (+6.7%), utilities (+12.1%) and pharmaceuticals (+12.8) have lagged the S & P 500 index.
• Declining corporate bond prices: The Bloomberg Barclays 5-10 Year Corporate Bond Index is up 5.11% year-to-date. Even better, the Bloomberg Barclays High Yield Corporate index is up 6.85%.

Many of the signals of a market top have not appeared. Perhaps a geopolitical event will cause the next big drop. Who knows? There are plenty of things to worry about.

Cautiously Optimistic

Despite stretched valuations, chances are good that stocks will continue to do better than bonds – climbing a “wall of worry” as they say – into 2018 and even 2019. Earnings should be good. The economy is plugging along. Republicans desperately need a win and tax reform may be their victory. And the Fed will remain supportive. Every step up increases the chance of a fast, steep drop, so I don’t recommend adding aggressively to stocks right now. However, I don’t yet think it’s time to underweight stocks either.

Please let me know if you have any questions or concerns. – Henry