The stock market has returned more in the first five months of the year than we would expect for a full year. This usually means one of two things: We are ready for a correction or we are in the midst of a significant bull run.
Memorial Day signals the start of summer, which can mean the start of the weakest months on the stock market, depending on the year. The summer doldrums can set in and if Wall Street is quiet and the New Yorkers head off to the Hamptons, then we could have a flat summer. If summer fun includes bad news for crops, such as drought, flooding, fires, all which happened in the last 2 years, then commodities, agriculture in particular could soar which may incur a pullback in the sectors not dependent on weather or dwindling supply.
If the Federal Reserve Board determines Quantitative Easing 3 is no longer needed, then as they stop their bond purchases, not only could bond prices falter, but the equities markets may have the feeling of swimming without a life vest for the first time since 2008.
There are analysts on both sides of the fence: Those who believe we are headed towards a significant correction; and those who believe we are at the infant stages of a bull market. Therefore, the likelihood of a watered down version of the extremes is probably what we are in for. Yes there could be sustainable growth from this point forward, and yes there will be volatility along the way. Therefore, your investment decisions will be based significantly on your time-frame and when you will need the asset you are investing. Long-term investing could add value over the next decade or two despite corrections along the way. Short-term is never a good gamble especially at record market highs.
The very activity on Wall Street has spurred more optimism, pushing Consumer Confidence up from 68 to 76, an impressive jump. How much of that confidence is coming from investors compared to those looking for employment is yet to be determined. However, the continued momentum is feeding higher consumer confidence and higher stock prices.
Milton Ezrati makes the case for continued growth based largely on two main factors: Stock valuations and equity risk premium. Ezrati states in his recent newsletter that the investor should consider the relationship between stock prices and corporate profits. Current earnings for the S&P 500 equates to an earnings multiple of 16.1, which is well below the average multiple of 19.6 over the prior 20 years.¹
“Another valuation perspective was recently provided by the New York Federal Reserve, which found that the equity-risk premium—the excess return of stocks minus Treasury yields—is hovering near a record-high level, primarily due to historically low interest rates.”¹
In order to give the bears a fair shake I researched the gloomiest forecaster of all, Nouriel Roubini who indicated at a recent conference that even he “likes stocks for now”. "Markets look happy, but what is going on in the general economy is not," says Roubini. "We are stuck in a two-year boom and bust cycle.”²
Investors will have to determine which side of the fence they are on and review their portfolio for the best opportunities both short and long-term.
- Milton Ezrati, Lord Abbett Partner, Senior Economist and Market Strategist; 2. Nouriel Roubini, New York University economist.
Patricia Kummer has been an independent Certified Financial Planner for 26 years and is President of Kummer Financial Strategies, Inc., a Registered Investment Advisor in Highlands Ranch, 3 year Top Wealth Manager 5280. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice.