February 2018 Market Update

WOW at the DOW!! The Dow Jones Industrial Average passed the 25,000 mark for the first time in history on January 4th, which would have been the news of the month if it hadn’t passed 26,000 on the 17th. The stock market has been on a tear since… well… the election of Donald Trump. Whether you think this growing economy and market belongs to the current president or the past president, the reality is that anyone invested in it gets to benefit from it. However, fewer people seem to believe the market can also have a downside. If you ask people why they buy stocks, the answer is usually the same: it just seems to keep going up. In other words, one doesn’t need a good economic reason to buy (sales/earnings/the usual textbook answers), one just needs someone to sell it to at a higher price later on. And so far, since the recession of 2008, that reasoning has worked.

In a recent Morgan Stanley article, they note “we have seen a total reversal with people now having a hard time even imagining how the market could decline.” According to a survey from the American Association of Individual Investors (AAII), which asks individual investors what direction they think the stock market will be in the next six months, almost 60% of investors are bullish. This is the highest percentage of bullish responses recorded by the survey since 2010. There’s an old saying that the stock market climbs a ‘wall of worry.’ And it only falls once investors become euphoric, believing that “this time it’s different.” It looks to me like euphoria may be starting to set in.

Our models are fully invested for the time being because all our research indicators are all positive. So being that we are fully invested, we are keeping up pretty well with the torrid pace the market is setting. However, we have been around way too long to think the market can’t reverse on us quickly. So we will continue to keep our ear to the track, observe the overall market direction, and set our sails accordingly. I’ve told new clients this many times, “The more you know about what we’re doing, the better you’ll like what we’re doing.” Let’s face it, our model portfolios have not kept pace with the overall market over the last few years. And when we are in the middle of a low-volatility, steadily advancing market, trying to explain our value proposition to a client can be difficult. But I had much rather explain to a retired client why his account was only up 3% while the market was up 12%, than to explain why his account just tanked by 40% because of the market, and he’s going to have to reduce his income accordingly. Conversation 1 is unpleasant. Conversation 2 is one I never plan to need to have with a client. That is why we work so hard to keep our clients’ portfolios adjusted in a way to help avoid a serious erosion of value. While we cannot guarantee any set rate of return, just know that we are here every day working to reduce risk while still maintaining a good return.