The economy was stronger in the first half of the year than originally thought with the first quarter coming in at 2% GDP growth and the second quarter at 3%. The third quarter initially seemed to be coming in at a 4% rate according to the Atlanta Federal Reserve Bank, but that had been substantially lowered to 2.2% by September 19th. The full impacts of hurricanes Harvey, Irma, and Maria are not yet reflected in these numbers. Thus, it appears we continue to have an economy stuck in second gear.
This has been quite a Teflon market. Nothing so far has seemed to bother it. Many seem to think this bull market is strong. Let’s take an honest look at the bull market. As my friends at Hays Advisory** point out, a bull market, like a good table, has four legs—the trend, valuation, psychology, and monetary conditions. How solid are the legs? The first, the trend, is in fine shape as far as the major averages go, although most of the gains are in the large cap asset class. This leg is strong. The second, valuation, as I have mentioned numerous times, is at extremes not seen since 2000. In fact, most measures of valuation imply that it will take a significant drop to bring the market close to fair value! So, this leg is gone. Now, valuation does not tell you when a bull market will end. Valuation tells you how much capacity there is to the downside once a bear market begins. The third leg is psychology. Rarely have I seen such a complacent market. The S&P 500 hasn’t even had a 5% drop in almost 18 months—the longest period since the early 1990s. Add to that a host of other measures, including record-high margin debt, and it is difficult to escape the conclusion that psychology is bearish at this point. This leg also appears to be gone. The final leg is monetary conditions. This refers to the level and direction of interest rates and overall liquidity. Most bull markets end when monetary conditions sour. This leg is still intact, but is wobbly. Therefore, we have a table with one strong leg, one wobbly, and two that are missing. A two-legged table can still stand, but it is shaky and it won’t take much to topple it over. This is a good time to check your asset allocation and to make sure the amount you have exposed to stocks is inside your comfort zone. Give us a call if we can help.
Lee, Leslie, and Matt attended LPL’s national conference in Boston for continuing education and exposure to new ideas. Leslie, by the way, celebrated 15 years with our firm this September! We launched our new website in September; it is filled with even more useful information that is easy to view on any device. One of our clients, Ruth Rogers, became our first client to reach the age of 100! She is a magnificent lady and you can read more about her in this newsletter. Finally, Leslie’s husband Tony was promoted to Lieutenant with the Florence County Sheriff’s Office. We are very proud of him as he has only been with them six and half years.