Climbing A Wall of Worry
February 17, 2017
One of the great adages of the investment business is that bull markets climb a wall of worry. "How can the stock market be hitting new highs when so much is wrong in the world?" “Isn’t the market riskier now after a nearly 8-year bull run?” “Aren’t we in the 8th or 9th inning of this bull market?” “Aren’t stock valuations rich?” These are all good questions. The truth is we would be more worried if we were not fielding these questions.
This bull market is the second longest in history at 2,902 days or roughly 95 months. Certainly, relative to the average bull market of 54 months, the current advance is old, but don’t call it over yet as it still may eclipse the longest bull market (3,452 days) - only another 18 months away.
Corporate Tax Reform
Investors are looking at the new administration and the new Congress for potential tax reform, fiscal expansion and deregulation. Below is a look at how the United States stacks up on corporate income tax rates with other nations. It would appear the U.S. needs to level the playing field.
Over the past 10 years, Germany, Japan, Canada, Korea and the UK have all cut tax their corporate tax rates – the UK by 33%! All countries are lower and the UK’s corporate tax rate is essentially half! Lower corporate income taxes in the U.S. would translate into higher corporate earnings (and make valuations less rich).
Low Volatility Market
On November 9, the morning after the US election, the US stock market was set to open down 2% - well off the -6% lows in overnight trading, but still down. The Japan Nikkei was trading -5.4%. The VIX (a measure of market volatility) was elevated at 21 – it would deflate by a third to 14 by the end of the trading day and the S&P 500 closed +1%.
Since November 9, the S&P 500 has climbed 10.3% and the VIX has been range-bound at a low level. Although 40% of the days have been negative over the past 67 trading days, not once has the index closed down more than 1% (-0.83% the worst daily performance on Dec 14 and Dec 28). The intra-day change (high-low) has only been greater than 1% three times since November 10.
Financial Health Check-Up
Households and corporations are looking solid. The household debt service ratio at 10% is near the lowest level over the past 37 years and household net worth is at an all-time.
Corporate bond issuance had a record year in 2016 and has started 2017 with the strongest start, ever. What does that mean for stocks and equity investors? More stock buybacks! More M&A! And more dividends!
One of the keys to investing is sifting through all available information and sticking to a plan. Somehow, we need to control our emotions about something that is very important to each of us. We invite you to call or email anytime if you have questions about how we can help you with your wealth management. Please give us a call at (415) 249-6337 or email us at email@example.com to learn more.
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This commentary and previous editions are available as PDFs:
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
1/13/2017: I Gotta Feeling
1/6/2017: Finally, A Case for International in Your Portfolio
12/30/2016: Predicting the Future -2017
12/23/2016: Bullish New Year
12/16/2016: All I Want For Christmas is Financial Independence
12/9/2016: Debt Trap
12/2/2016: Trade What Is, Not What You Think It Should Be – 2017 Outlook
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