The Dow is Back Above 18,000 – Here Are Some Thoughts

By David B. Armstrong, CFA | Apr 19, 2016 | Weekly Market Commentary

First of all, congratulations to the entire Team here at Monument on receiving the honor of being a Best Place to Work in D.C. for the 4th year in a row from the Washington Business Journal. Dean and I are both very proud of the entire Team at Monument. It is each one of them that truly makes Monument one of the Best Places to Work.

The past year has been very interesting and let me tell you, I feel like I have heard it all. Earlier this year I got this now famous line circulating here at Monument:

“Over the past year, I’ve had a chance to really become a student of the market and I told you I saw this whole thing coming and you didn’t believe me…”

Let me remind everyone about what we have witnessed…two +10% equity market declines and subsequent rebounds since last summer.

TWO.

Oh, and we have seen a 15% rebound just under 50 trading days.

I’d like to point out the key word in both of those sentences is REBOUND.

Back to Mr. Crystal Ball…if I had the opportunity to deliver a snarky reply to the originator of that now famous line, I imagine it would sound dangerously close to this:

“Tell me again, how you saw this whole thing coming?”

Ten bucks says the person is still un-invested and has participated in none of the 15% rebound. I just really, truly believe that the silver bullet to growing wealth is to have a long-term plan which includes cash for any 18-month future need for liquidity. Other than that, leave your portfolio alone.

The reason, which I stated this past January, a second time in January, back in August of 2015, and many more times before is that the only people who think they “can see the whole thing coming” are either charlatans or fools.

I’ve used this chart from Dr. David Kelly at JP Morgan Asset Management before, but it shows how silly it is to try to guess and why it makes sense to just not do anything if you don’t need the money. It goes up until July of 2015, but still gets the point across. Every year has a peak to trough drop, but only eight years have an overall negative or zero return.

This is also important for investors who see any drop from the highest level of portfolio value as losing money.

Looking at the Two Recent Declines

In both of the declines, the original plunge was mainly due to some anxieties over growth. The first was mostly centered on China, which you can read more about here, and then the second time was more about (queue the doom and gloom music) the United States. See this blog for more details.

Here’s the deal, though. Over the past couple of months, economic circumstances appear to have steadied and the equity markets have responded favorably. China has also been a little more transparent in their policy intentions.

Our Opinion Has Not Changed.

We still think that the economy, while tepid, is still growing and along with current valuations in the equity market, we think long-term investors should have a higher weighting toward equities than fixed income. Could valuations be cheaper? Yes. The problem is that when they are, most people don’t want to invest and in fact contemplate selling instead.

Is Our View Correct?

Only time will tell but we are just (broken record alert) not seeing signs of a recession. This opinion could change quickly, but it’s important to reiterate that just because the economy is experiencing tepid growth does not mean it is going to turn negative. The economy IS expanding! Unfortunately, it’s just not at an impressive rate. The current economic expansion is enough to put a soft floor under corporate profits, which lends support to stocks. It’s also enough to create new jobs, but prevents the Federal Reserve from taking on a more aggressive stance toward interest rates.

Sentiment is healthier today than it was around mid-February, however still a little bearish. Here’s a chart, again from Bespoke. It’s a profound view of just how traumatized the average investor (most likely you – the individual investor and reader) is from the early 2000’s tech crash and the 2008 crash versus the institutional investor (a segment in which we do not work with). The blue line is Institutional Sentiment minus the Individual Sentiment.

The bearishness is especially interesting as we approach historical highs of the market and inch toward crossing back through 200-day moving averages. (Disclaimer: These Bespoke charts are from pre-Monday close and Tuesday action.)

Please call with any questions or concerns – we are here to help. But in signing off I’ll remind everyone that the best way to navigate this or any market is to have a plan that determines your need for cash for the next year or two, and then keeps the rest of your money invested. Meaning, if you don’t need the money, why bother selling?

Those who chose emotion or panic in February missed a historic rebound, as we are closing in on new highs.

Did anyone out there see that coming?

[Insert cricket noise]

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