Since everyone is in a panic about the weather tomorrow I thought I’d take a second to remind everyone what Riley Wealth Management, LLC follows the winter weather policy of the school district the office is located in. At times we may close early or arrive late for our own safety. When we are closed for weather we can be reached via email.
Please be safe and prepared.
Have you ever watched an old grandfather clock with a pendulum swinging from one side to the other and become somewhat hypnotized with its movements? Think of the market like that clock. The left side as we face the clock is oversold and the right is overbought then understanding market movements start to make sense. As the pendulum reaches the peak of its movement on the left side as it was in early 2009 and now it may be reaching its peak in 2014. What we can learn from this is that markets will always travel from oversold to overbought, however to profit you must have a strategy that compensates for these movements.
The bull market run continues with all major indexes hitting all time highs except for the NASDAQ which is reaching a 13 year high. Next week is a very important week in the context of data and a policy statement from the Fed which could set the tone for 2014. Unless the data is much stronger than it has been, tapering will not commence until early spring 2014. As long as any action from the Fed does not drive up the 10 year above 3.00% then the bull market should remain intact. I still feel that the fair market value of stocks is still 10% to 15% higher, although markets rarely reach their fair value in a straight line.
Over the holiday I dug out of my library an old book on trend following. It is always enlightening how basic market principles never change even with all the new technology and evolution of various trading concepts. Right now the market is in a strong uptrend and these types of trends are not easily broken. Observing our three elements of market health (investor psychology, monetary conditions, and market valuations) we find an overall bullish condition.
The problem is that most market watchers especially public investors and most professionals pay so much attention to the short term view. Short term views are the most unpredictable and are the one that keeps the public investor on the sidelines until the news turns out very good. This results in buying high and selling low. Consumer sentiment is right at the lows of the last few years and this intense pessimism has occurred throughout this rally-the S&P has moved from its low of March 9th,2009, to Fridays close of 1806, almost tripling from that low point in 2009. During this period everyone I talked to never really felt good about the U.S. and world economy, or the low risk of the market and this feeling is still prominent today.
If our observations are correct then the S&P could reach 2014 in 2014, however it will not be a straight line and possibility of a correction is in the cards but will help accelerate this 2014 in 2014 due to so much cash on the sidelines will provide much need demand for equities.
I just wanted to share something that makes me smile. Everyone should take a moment to read the story below.
Today the city of San Francisco, California transforms into Gotham to make the dreams of a young leukemia patient come true.
Miles’ Wish To Be Batkid | News | News & Events | Make-A-Wish® Greater Bay Area.
Now that the interest of the “cash under the mattress” crowd in the market has piqued, I wanted to discuss what market bottoms and tops actually are. First of all, no one can time the market.
At a market bottoms the numbers of investors have surrendered and are convinced that the market will continue to decline over the foreseeable future. At a market top, the maximum number of investors has joined the party and is convinced that the market will continue to advance indefinitely. Both bull markets and bear markets are supported and driven by stories with no basis. Everyone has opinon on the causes of the trends in stock prices.
The reason people are using to explain the current bull market is the Federal Reserve keeping interest rates at historical lows. This has forced investors to abandon fixed income for returns in the stock market. The S&P 500 now yields 2%; which is better than nothing. However, people are slow to change their beliefs. This is why most investors stay on the sidelines after they sold their stocks in fear at the market bottom.
The current bull market has been in existence for four years and the doom and gloom stories have always gotten the most press. Early investors are sporting large gains and the doubters are beginning to look like fools. The latecomers are the last to recognize that the positive story no longer holds water. That is why the average investor who is trying to do it on their own has very low returns.
Market tops stretch out over time due to the “buy on the dips”. These are usually the “I don’t want to miss the next upside” crowd. However, the first time the dips turn into a correction it’s back to cash. Therefore locking in their losses and missing the next upturn.
Today’s bull market reflects wide acceptance of the Fed story. When will this change is anybody’s guess. Stocks can go up further and longer than anyone expects. This is why I preach it’s best for the average investor to disconnect from his or her limited vision of the investment world and trust in a clear discipline, based on fact, with a very long history of success.
IRS Phone Scam
The IRS issued a warning to consumers about a VERY PERVASIVE telephone scam targeting taxpayers throughout the country. Using sophisticated technology, these scammers appear to be legitimate IRS officials and make threats about police action if taxes and penalties are not paid immediately.
The same technology that makes so much of our lives easier today can return to haunt us as the scammers have the ability to spoof the IRS hotline number on a “target’s” caller ID and have sent bogus emails that appear to be from the IRS.
The retail investor is still like a “deer in the headlights” frozen in what action to take in their portfolios. Bond buyers exist and cash tends to be the largest allocation in most portfolios.
I can remember when the Dow Jones hit 1,000 and investors were saying the market was too high. Again at 10,000 everyone was celebrating and then getting out of the market. I have always judged markets reaching all-time highs by applying the Rule of 20. The Rule of 20 states that when you use 20 as a high P/E threshold then subtracting the current inflation rate (which is really about 2.8 %) you get the reality Price/Earnings (currently roughly 17.2). That is where the P/E of the S&P should be but we are at 14.8 by most calculations. That means that the market still has room to run.
Valuation and Monetary Supply are two very important factors in valuating markets and both of these are still very positive. What we need is as excuse for the high degree of cash to find its way back into the market and that may be a small correction to get the “markets to high group” back in the game.
Thanks for reading and would welcome your views.
I have to admit I have liked Kathleen Sebelius since the day I met her. As Governor of the State of Kansas she was a breakfast keynote speaker at the Kansas Independent Oil and Gas Association annual meeting a number of years ago and I was at the meeting visiting with our clients in the industry and as my grandfather’s guest. Kathleen took the time before her speech to come over and say hello to my grandfather and meet me. I wasn’t her constituent but she took her time to for our introduction, for my grandfather to brag on me (he was a wonderful grandfather and is greatly missed) and to check in on a former Chairman of Kansas Corporation Commission. Kathleen’s genuine interest in and respect for my grandfather impressed me and has stuck with me since that morning.
Fast forward a few years: Kathleen is now the U.S. Secretary of Health and Human Services (and is currently being grilled by the House Energy and Commerce Committee on television) my grandfather has passed and my boyfriend’s current employer does not offer health insurance. Since cold and flu season hits me almost every year (for the record: I always get the Flu Shot) as soon as www.healthcare.org went live we tried to sign my boyfriend up. It was an extreme exercise in futility. Several tries later, he has a log in but has been unable to complete the application. And we have no idea what his healthcare is going to cost.
Seeing Kathleen on television and my personal experience on healthcare.gov got me thinking about how I, as a CERTIFIED FINANCIAL PLANNER™, plan for costs of health care in our financial plans. As we review financial plans over the coming months I’m going to place an emphasis beyond the budget estimates on what health care costs in retirement will be and work to incorporate them into our plans.
Have a safe and happy Halloween!
Brie Horigan, CFP®