Brian Nelson, CFA
March 15th marked the 106th consecutive trading session that neither the Dow Jones Industrial Average (DIA) nor the S&P 500 (SPY) has declined 1% during any one day. The streak is now the seventh longest in stock market history for the Dow and the 10th longest for the S&P 500. The markets are now 49 days shy from tying the March 1, 1966, record for the Dow and 79 days shy from the November 21, 1963, record that ended the day before JFK was assassinated. What you see above is not a representation of the latest consecutive streak, but instead a visual of the upward trajectory of the S&P 500 since the March 2009 panic bottom, now more than 8 years ago. What a bull market it continues to be, and investors have experienced nothing short of a lift-off so far in 2017. Remember I called this year the “Year of Evangeline Adams?” It looks that way.
I like that I receive a lot of emails from members concerned about the frothiness of the markets. To me, it is a sign that we are doing our job well, and that you are informed, and that there should be no surprises in the event of any sharp market correction–driven only by profit-taking, regardless of the economic environment. The move on the Dow Jones Industrial Average to 21,000 from 20,000, for example, was reminiscent of the late 1990s dot-com bubble, and we’re seeing the effects of the markets having what is technically described as no “overhead supply,” or having no higher price points that investors might sell to “get back to even.” With broader markets at or near all-time highs, and indexing on the meteoric rise, there are not a lot of investors looking to exit, regardless of the price. This is treacherous, and something you should be well aware of in the event such investors do decide to cash in their chips. Need I remind you that these investors haven’t truly been tested in this 8-year upward-sloping bull market?
According to FactSet, the S&P 500 is now trading at ~16.3 times calendar 2018 earnings – that’s expected earnings for the calendar year ending in more than 18 months from now. What I’m skeptical of is the expected growth rate in earnings to $146.75 in calendar 2018 from $131.28 in calendar 2017, an expected bottom-line improvement of nearly 12% on the largest companies in America. The market seems to be placing its hopes on Trump’s corporate tax reduction plan being approved before the end of 2017, a bet that may be a bit premature. What we find to be even more concerning is that, even if Trump’s tax plan is approved in time to “meet” calendar 2018 earnings expectations for the S&P 500, today the market is still trading north of 16 times those numbers, a multiple above the still-bloating 5-year average of 15 and well above the 10-year average of 13.9–and all of this in a contractionary credit environment (i.e. the Fed is raising rates!).
Here’s what I said in the “5 Shocking Stock Market Predictions for 2017” in December 2016, which I believe is worth repeating today:
“the stock market, in my view, is in a bubble, perhaps to nobody’s real surprise. But maybe to some surprise, I don’t think this bubble will burst in 2017, nor does it have to. I think it will only get bigger (in 2017). (Just like) Evangeline Adams said in 1929, it’s possible 2017 may be the year that “stocks climb to heaven.”
I worry immensely, however, about the implications once this bubble does pop (in 2018? 2019? – will rising interest rates be the catalyst?), which is why we continue to exercise caution and prudence in the newsletter portfolios, but their respective returns, too, may reach all-time highs…yet again…during 2017. We expect most of the alpha-generation in the newsletter portfolios to occur during an inevitable reversion-to-the mean scenario, which may not occur until after next year.
Making money is only part of the story. Keeping it is the most important other part! That’s why we’re NOT going all-in in this frothy market, even though we think 2017 will be another good year, albeit for unsustainable (and behavioral) reasons…
…In true Wizard of Oz fashion, President Donald Trump will do whatever he can to drive the US equity market higher during his first year in office. He will have his hands in everything, far more than any other President before him.
I believe he will influence Fed policy. I believe he will be successful modifying the tax code. Parts of Dodd-Frank and Obamacare are on the chopping block and will likely be chopped. I believe that he will pull years and years of US growth into his first year at the helm of this country, a move that will provide a false sense of the true pace of economic growth in the US. The pace may even convince many that the US is somehow ushering in a new era of unbridled expansion, giving misguided support to the euphoric rise in stocks during the year.
Donald Trump wants to win. He has to win – and the stock market is one of the biggest yardsticks to measure whether he wins or not. We’re not ready to say the latter part of a Trump Presidency will result in the next stock market crash in US history (odds are it might), but I believe 2017, his first year, will be one of the best for stock holders…
…I’m excited about what 2017 may bring, even as I’m worried about 2018 and beyond.”
The Best Ideas Newsletter portfolio has once again notched an all-time high, as March performance reveals, and the relative outperformance measure continues to creep higher in recent months, too, despite a benchmark that continues to surge higher. Apple (AAPL), Altria (MO) and Visa (V) are powering the newsletter portfolio higher, but how can we really complain about anything? Keeping pace with this “frothy” market during the past few years has been a fantastic achievement in itself, and we’re proud of that. Many true value investors may have already cashed in their chips a few years ago, settling for vast underperformance. Valuentum investors, on the other hand, continue to reap the rewards of this market with the understanding that profit taking is much more likely than further capital deployment.
Let me leave you with this–the S&P 500 has advanced more than 250% since the March 2009 panic bottom when it closed at 676.53 on the 9th of the month. Today, March 15, 2017, it closed at 2,385.26. The performance represents “a triple and then some” in the 8 years of this aging bull market. This is not performance on speculative small caps or risky biotechs, but on the largest companies in America. Please exercise prudence and care in all that you do.