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Market Update - Is the Bull getting tired?

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Increased stock market volatility continues

We are in the middle of the first quarter earnings season and although we usually see increased volatility during earnings season, the market is continuing to be more volatile than what we have been experiencing in recent years.  As we pointed out in our last market update (link), the low volatility in 2017 was actually the outlier.  Although, it is perfectly normal to go from a period of below average volatility to a period of normal to above average volatility, there is a little more going on in this market.  We see two things happening here; fear that earnings are near their peak and higher interest rates competing for investment dollars.

The stock market cycle

There is no doubt that we are in the later stages of the bull market.  The economy is at full employment, corporate earnings are strong and inflation is starting to perk up causing the Fed to continue raising short-term interest rates to “normalize” rates and to curb overheating.  History is also telling us that the bull market is long in the tooth.  We are currently 9.1 years into this bull market.  The chart below shows that the average bull market from 1926 until today averages 9 years.  The median bull market is 9.6 years.  We are very close to both of these.  

Peak earnings?

The stock market is always looking forward, trying to predict the future.  In March 2009, in the heart of the financial crisis, the stock market bottomed.  We didn’t know it at the time but it did.  This was before we hit the highest unemployment rate, before real estate recovered, and before corporate earnings reversed.   With where we are in the market cycle and the extremely strong quarterly earnings reports, fear is creeping into the market that earnings can’t get any better than where they are right now.  To some that doesn’t make sense, but sometimes that is the reason that a stock will go down after an extremely strong earnings report. After the peak of the dot-coms, in March of 2000, the first bad earnings reports didn’t happen until the September quarter, 6 months later.

Interest rates

With the strong earnings reports and the pick-up in inflation, last week the 10 year Treasury bond got over 3% for the first time since 2014.  Historically, this is still a low number but, psychologically, the markets don’t like the trend of higher rates. For the first time since 2009, the stock market is seeing some competition.  With interest rates as low as they have been for so long, investors were almost forced to take more risk by investing in the stock market.  All of a sudden, for some more risk-averse investors, fixed investments are becoming more attractive and we are seeing money leaving the interest-rate sensitive stocks and some of the more risky types of stocks.  This alone does not signal the end of the bull market, it just signals a change.  People in general don’t like change.  Since free markets are collectively people, markets don’t like change.  As we mentioned in our earlier post (link) about rising interest rates, the majority of the time, the stock market tends to move higher with interest rates.  The concern is if and when the Fed gets overzealous with their tightening and they choke off the growth in the economy (as they always do).  With interest rates still historically low, the growth in corporate earnings, and the lowered corporate tax rates kicking in, we don’t see that happening for a while.

As an investor, what should I do?

Unfortunately, like the peak of the dot-coms and the lows of the financial crisis, we won’t know when this bull market comes to an end until it has already happened.  That doesn’t mean that you shouldn’t be proactive.  Just as you would weatherproof your car for the winter season, right now is the time to review (weatherproof) your investment portfolio.  

Some of things to consider are:

  • What is my overall allocation?
  • Am I over weighted in any stock or sector that could negatively impact my portfolio?
  • Am I fully invested, should I be?
  • Should I take profits and/or re-balance my portfolio?
  • Is my portfolio too risky for me and/or my goals?

If you need some help assessing your portfolio, or just have some questions, send us an email, give us a call, or click the box to set an appointment.

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