With stocks continuing to go up and up, what’s not to like? Since the last Investment Update in mid-October, US stocks have gone up an additional 1.7%. YTD the S&P index is up 16%. Although hopes for a tax reform deal may be contributing to some of the rise, the primary driver is the growing global economy and stock market. The European economy is growing more rapidly than at any time since 2008. Developed stocks are up 18% YTD. Emerging markets continue to benefit from rising commodity prices, including oil. This asset class growth exceeds the growth of all the other asset classes, increasing at an exceptional rate YTD of 33%.
All this good news is hard to digest! Seriously, there is a lingering worry among ordinary and institutional investors that the global rise in stocks is unsustainable and that we are long overdue for a correction. The Wall Street Journal reports that at least by one popular measure, the Shiller cyclically adjusted price earnings ratio, readings of 31.3 from 27.9 earlier this year, point to lofty equity prices. (As a benchmark comparison the Shiller PE average over the past 50 years is 20.) Besides stretched valuations, the biggest risk to the stock market rise are central banks tightening access to cheap credit. In the US, the Federal Reserve is set to hike short-term interest rates by another quarter point; however, with the federal funds rate at 1.25%, domestic interest rates are still relatively low. Inflationary expectations also remain low.
As had been mentioned in previous articles, the challenge for the ordinary investors is where to put money in this low interest, low inflation, and equity rich environment. Keeping money on the sidelines is not much of an option. Besides exposing your portfolio to inflation risk, there is the risk of missing out on one or two years of continued stock market performance. Since one really doesn’t know when the market top will occur, it is best to keep your money working during all parts of the economic cycle.
Keeping your portfolio well diversified and continuing to make investments to your portfolio is the best hedge against a market downturn. By continually investing you will be guaranteed to take advantage of the ups and inevitable downs of the stock market. Let Christina or me know of your stock market concerns.
By Barry Jamieson