Still A Time For Optimism
As we close out a noteworthy year, it’s helpful to look around and see where we’re at in anticipation for what’s to come next year. I have written that we are in the early part of a new economic cycle, whereunemployment is still very high but coming down, which continually gives fuel to the economy as conditions gradually get better.
This is a situation that is a somewhat similar to 2010 when unemployment was at a high at the start of the year and started to come down. The differences are that unemployment has come down faster at start of this economic cycle and equity markets are already at an all time highs. So the equity market has already come a long ways.
There is an argument to be made that we may be due for a correction in stocks. After a quick advance from the lows of 2009 thru 2010 the market did have a tougher year in 2011. And we may be creating conditions for a similar situation here.
Some of it is because of valuation. As I’ve previously said, some parts of the market are cheap, like banks and other financials, but other parts of the market are highly valued. Tech stocks are highly valued. There is a lot of talk that there will be a rotation to value stocks, as they say prices for tech stocks are as frothy as they were in 2000. The problem with such comparisons is that by just comparing P/E ratios from one era to another people assume it’s the same conditions as before.
But there are quite a few differences. One is that the quality of many of the stocks is better. Whereas valuations in 2000 were perhaps pricing a hoped for future, today the future is here for technology. We are surrounded by it. Whereas in 2000 technology mostly existed at our work, now it is at school, at home, in our pockets. Whereas in 2000, servers were placed on the premises, today they are accessible anywhere though the cloud. This is not even to mention that technology is in many of our social interactions, our consumer commerce, our financial payment systems, and other social practices. The upshot is that we keep doing more and more stuff on computers. And that’s not a trend that is going to slow or reverse itself. Now, you can question whether too much of that technology adoption is beingpriced into today’s tech stock prices. But in 2000, the investment of tech stocks was based on an ideal mostly and today it’s based on both an ideal and a palpable pathway to reach it. That what’s moreconcrete about investing in technology today.
So while there may be a correction, or corrections, in stocks, led by a decline in technology stocks, the corrections are likely to be short lived (at least for now), lasting only weeks or months as opposed to a bear market that lasts years, as was the case after the dot com crash. In fact, investors should expect corrections to occur periodically especially with technology stocks. The market tends to overprice the value of growth when making money becomes easy, and the momentum becomes incredible. A selloff occurs when the pricing becomes excessive. Then some time afterwards, if the growth of the underlying business continues, the stocks of these businesses will find buyers again. That’s the nature of investing in growth.
Perhaps the biggest risk to stocks is the potential for rising rates. When the Fed lowered short term rates to near zero, and pulled long term rates to around 2%, this had the effect of inflating the value of many assets. Now, if the Fed were to reverse itself, immediately end QE, and allow long term rates to rise, this would be deflating for equities and other assets. The last time the Fed began raising rates in2018, we got a selling off of stocks. It didn’t happen all at once, at the moment they started, but afterthree consecutive raises, the market began an unrelenting decline in October 2018, led by the FANG stocks. It was a somewhat unusual selloff in that it wasn’t caused by an exogenous or newsworthy event and it was not sudden. It occurred over three months, during which time the volatility index never got above 30 until the bottom of the market. But we see little risk of a major sell off now as a result of rising rates. The Fed has stated that we are some years before they begin raising them again.
Nevertheless, risks can emerge for other reasons. This is especially true when making money becomes too easy. Making money should not be easy. Otherwise it wouldn’t be valuable. Easy money may exist in the short-term but not for long periods of time. And we as portfolio managers at CrossPoint Wealth are keenly interested in taking some risk off if a significant sell-off is foreseeable. The reason I have written about the market and economic cycle recently is that they have such a large effect on returns. And very few stocks go up or even stay even during a deep market correction. So if we do find a correction is about to occur don’t be surprised if we take some risk off in your portfolio or 401(k).
If you would like a review of your portfolio or 401(k) please email us at info@crosspointwealth.com
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Contributions from this quarterly report are from Christopher Chiu, CFA, Portfolio Manager at RCM Wealth Advisors. The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation. The information herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any CrossPoint Wealth or RCM investment vehicle. Any offer can only be made to persons whose eligibility to invest has been determined only in jurisdictions where such offer is permissible and only through the appropriate offering materials for the product, which contain important information concerning risk factors and other material aspects of the investment. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user.
