Okay, I Get It… I’m Late Posting a Blog.

By David B. Armstrong, CFA | Apr 22, 2015 | Weekly Market Commentary

I got a good ribbing from a great client this week about the quality of my blogs… He basically said, “I can tell how detailed your blog will be by how quickly the disclaimers come rolling up.”  Well, this may be one of those weeks that the disclaimers come rolling up quick, BUT, I think I have a few thoughts worth sharing.  Especially for all you folks in the “Chicken Little” camp.

I saw a quote the other day and I’m going to share it with you to set up my quick thoughts on the current level of the U.S. equity markets.  It was by Marc Faber, who is the publisher of The Gloom, Boom and Doom Report.

If it were published and sold as a magazine in the airport it would probably be wedged somewhere between Guns and Ammo’s Annual Review of the Best Defense Handguns to Have In A Zombie Attack and Prepper Magazine – Your Survival Guide for the End of the World as We Know It. 

Here’s the quote:

“We are again in a massive financial bubble in bonds, in equities, a bubble in asset prices.”

That’s the quote as I read it, so the incomplete sentence structure is not an editing error on my part.  But it begs the question, “Is there any credence to be given to a statement like that found in a publication called The Gloom, Boom and Doom Report?”

Here are my thoughts:

1. Upfront, let me say this to all of you who want to skip right to reading the disclaimers… equities may be expensive, but I don’t believe that they are in a bubble. At all.

2. Low and steady inflation rates, like we have today and have had for a while, have usually buttressed higher equity markets and valuations like we are seeing today.

3. I don’t think the current valuations are out of line with the current macroeconomic environment.

a. My observations and research of equities markets (more specifically the S&P 500 in this case) leads me to believe that peaks are led by some combination of tighter labor markets, a higher interest rate environment and higher inflation.

i.  You can make an argument that we are seeing a tighter labor market, but seriously that may be like the first inning.

ii. Even if the Fed raises interest rates, they are not high by any stretch of the imagination.

iii. Inflation? Please… Go buy gas and then let’s talk inflation.

4. Question: “If you are in the ‘U.S equity market bubble camp,’ are you loading the boat with Eurozone and emerging market/developing market equities?” Because they are undervalued and trading at a big discount to the U.S.

a. Hmmm – your answer was no?  Well that’s probably because you value a well-diversified portfolio over betting on what market is in a bubble and where the market is heading next.

i. P.S…. Good for you.

b. You answered yes? Well, no one can say you are not willing to put your money where your mouth is.

i. Next step? Start a hedge fund. It’s what everyone does who is right, right now.

ii. Hum the tune, “Everybody was Kung Fu Fighting.” It’s a classic one hit wonder that everyone knows the tune… but no one remembers Carl Douglas… because he was only right once.

5. Hypothetically, if today were the day that the Fed tightened rates, it would not signal that this was the peak of the S&P 500 AND we’d still probably be a long way off from any sort of recession. I read a Goldman Sachs research report recently that had some good stats on the average time between events:

a. From the time the Fed tightens until the peak on the S&P 500 is hit is 18 months, on average.

b. Then it is another 10 months on average until the recession hits.

c. So on average, it takes 28 months from the time the Fed tightens until there is a recession. That’s’ a long time.

I hope this helps put things into perspective.

I still don’t think we have seen the boost to the economy from the cut in gas prices.  True, gas prices have moved up off the low, BUT, according to JP Morgan’s Research group, historically, from the first of the year until this point in the year, gas prices are typically up 18%. Right now, we have only seen gas prices move up 8.4%.  So while they are up, they are nowhere near the historical increase that we usually see heading into summer.  Oh, and crude oil reserves have risen 14-straight months.

Consumers have put $100 billion of gas savings into their bank savings.  That’s a lot.

Given the oil supply, gas prices, $100 billing in savings, the historical length of time it takes on average to hit a recession, the low interest rates, and low inflation numbers, I’m suggesting that investors keep an allocation that favors growth over value, small and mid-cap exposure over large, and stick to the cyclical sectors of the U.S. equity markets versus going defensive.

Increasing developed and developing markets exposure if you don’t have any is an idea to consider if you feel the need to do something…

The good news? If you are a Monument Wealth Management client, your allocation is in good shape with us right now… we have this all covered for you.

Now, here are your disclaimers…

Important Disclosure Information for “Okay, I Get It… I’m Late Posting a Blog”

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