Price
At the end of September, the five ETFs (VTI, VEU, IEF, VNQ, DBC) we follow for price movements were all trading above their 10-month and 12-month simple moving averages. Price movements indicate that investors should be invested in all asset classes for the month of October. Since markets don't go up forever, the recent lack of volatility and lack of negative monthly returns reveals we should be prepared for a correction while anticipating that the path of least resistance for stocks is higher. Liz Ann Sonders and her team at Schwab highlighted the MSCI All Country World Index in their latest Market Perspective report released on September 29, 2017. They noted that this index has tied its record for longest monthly gains streak at 11 months (see graph below). This begs the question, will October set a new record?
Source: Schwab Market Perspective: Fourth Quarter Fun…or Folly?
Sentiment
Source: CNN Money Fear and Greed Index
The CNN Money Fear & Greed Index ended September with a reading of 85. This indicates investors are extremely greedy as we start October. When investors are feeling this greedy it often makes sense to rebalance any of your positions trading above your long term allocation plan. Second, when this reading is above 80, consider investing any new money over a few weeks or months.
Valuation
If you don't believe in the P/E10 or any of the other indicators showing this market is a bit overpriced. Let's change our valuation discussion to a perspective from Brian Reynolds at Canaccord Genuity as noted on Barrons.com:
We remind people that the credit market has grown by 68% since the last financial crisis ended, while nominal GDP is up only 33%. We are leveraging up our economy to boost stock prices, and that will likely continue until two years after the yield curve inverts. That is the main thing that equity investors should focus on.To read more on Brian's theory about pension funds fueling this bull market, please read the MarketWatch article by Tomi Kilgore, This is why the bull market can keep running for years even if investors dump stocks.
Summary
Price action indicates investors should be investing in multiple asset classes, sentiment has reached extreme greed, and valuations remain elevated. As long as the economic environment continues to accelerate and inflation stays subdued the path of least resistance continues to be higher for stocks. I will be unoriginal in stating that we should expect more volatility as we enter the fourth quarter. Michael Batnik blogging at The Irrelevant Investor blog recently posted a piece about new highs in the market. He states:
"Since 1980, the S&P 500 has experienced 737 new highs (171 in the recent bull market that started in 2013). Of those 737 new highs, only three of them were major tops. So the data emphatically suggests that new highs are often the best time to buy, not to sell."He goes on to write:
"It’s been almost ten years since the market topped in 2007, prior to crashing nearly 58%. If you bought the S&P 500 on the exact day that the market topped and held on for dear life, ten years later, you would have doubled your money, earning just over 7% a year."As we've discussed before, the time to prepare for a correction is before the correction has occurred, not after the correction has impacted your life. Fidelity's Viewpoint team recently published an article titled: Are You Ready for a Correction? They state in this article:
"A recent analysis of Fidelity Personal Investing client accounts, primarily brokerage and IRA accounts, shows that the rising markets and investor behavior have combined to drive up stock holdings as a proportion of portfolios. Back in 2009, Fidelity investors overall had 52% of assets in stocks; by the end of 2016, Fidelity investors had 67% of assets in stocks—back to levels last seen just before the financial crisis."They also discuss how to handle corrections and make sure you are following your plan.
"The time to consider how much of a loss you can handle isn’t during a correction. Rather, you should consider the appropriate risk level for your portfolio when you are looking at your long-term goals, and think clearly about your financial situation and emotional reaction to risk. If you haven’t created a plan, you should. If you have one, it may be worth checking in to see if your investments are still in line with that plan. If they are, you should be fine living through the ups and downs of the market."Let's end this market update with this quote from Charlie Munger:
"I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you."As always, wise investing my friends.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.
