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Market Commentary 3/31/2017

Preparing for Volatility

The bull market is now the second longest since the Great Depression with the third largest overall gain. The past eight years have been driven by monetary policy supporting low interest rates, low inflation, and low unemployment.  When we look back at this quarter, there is momentum of perceived change on the horizon that is running alongside an underlying improving U.S. economy.  As investors, we all enjoy quarters like this, especially when almost every sector was up.  So far this year international equities have outperformed domestic equities, which is a surprise given the elections to take place in France and Germany.

Should we be concerned that stocks have risen to all-time highs even though the fundamentals in the overall market remain unchanged? In reality you would think that the stock market is off the charts high. However, a recent T. Rowe Price report found that the S&P 500 price-earnings ratio of 17 based on estimated 2017 earnings was only 10% higher than the markets average P/E of the past 15 years.1 Share prices are not way out of line, just slightly. Most economists and portfolio managers are not seeing signs of a major pullback although they always welcome one since it provides investment opportunities.

Is there a shift in the wind?

Clearly the winds of change we wrote about last quarter are blowing. We have seen markets rise rapidly on talk of decreased regulation, infrastructure spending, reduction in personal and corporate tax rates, construction of a wall, better trade agreements, increased military spending  and revamping of the Affordable Care Act.  Since the election, the wind has been in our sails in anticipation of a transition away from monetary policy geared toward enticing consumers to spend more in a low interest and no inflationary time period.  Now we are faced with a new transition from monetary policy to fiscal policy driven by tax cuts and less regulation.

Is this new transition cause for concern or celebration? We believe it is still too early to tell since there are many headwinds.  The underlying economy is showing signs of improvement not only in the U.S. but also globally.  The Federal Reserve is showing more confidence in the economy with its recent rate hike.  According to Janet Yellen, President of the Fed Reserve, the economy shows it has more tread to absorb inflation and higher interest rates with more rate hikes in the future planned, provided key inflation and labor targets are met.2

What do prudent investors do at times like these?

We believe you should prepare for volatility by taking advantage of increases in portfolio value. Successful investors take profits from time to time, while staying well-diversified in case markets move higher.

Since you know the market is trading at all-time highs ask yourself whether you have a need for cash, immediately or within the next five years. Remember successful investors over time have the discipline to sell high and buy low.  You don’t have to time the market.  Our thought is to take what the market gives you from time to time.  If you are wrong and it continues to rise, consider taking profits again.  It’s okay that you are pocketing profits along the way.  When the market declines, you can look back knowing you sold at a high point.  Don’t be afraid to put some money back in after it goes down.

Our philosophy has always been don’t worry about volatility, but instead be prepared. A well-thought-out, diversified plan will help prepare you for the ups and downs in the market.  Most of the time, investors think that volatility is only downward, but we are of the mindset that volatility also has an upside.  Taking advantage recently of upside gains we think will bode well for you to meet your lifestyle needs going forward.

We appreciate the opportunity to help you align your investment risk along with your goals. Planning ahead, we hope will help you cope with volatility when it returns in the future.  We welcome your questions and look forward to talking with you soon.  Enjoy the spring ahead.

 
Thomas L. Menzel, CFP®                                            
President/Principal Owner          
                                                

 

[1] James K. Glassman, “Investors, stop worrying about a bear market ,” Fidelity, March 26, 2017, accessed March 30, 2017, https://www.fidelity.com/insights/markets-economy/stop-worrying-about-a-bear-market.

2Josie Cox, “US Fed chairwoman Janet Yellen’s interest rates comments send dollar to highest level in a month,” The Independent, February 14, 2017 accessed March 30, 2017, http://www.independent.co.uk/news/business/news/us-fed-chairwoman-janet-yellen-interest-rates-us-dollar-latest-rise-highest-level-federal-reserve-a7580071.html


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