Monthly Outlook: May 2017

April was just more of the same – and that’s a good thing. Global political news dominates the airwaves and media; meanwhile global stock markets just grind higher. U.S. stocks (Russell 3000) gained another 1.0% in April while international stocks (FTSE All‐ world ex‐USA) added another 2.1%. Bonds, too, contributed to performance with a 0.8% total return. We remain heavily invested with little cash reserves in light of the continued uptrends. There are always areas of concern but we need to “make hay” while we have the opportunity. We’re always watchful for any changes, as we discuss below, but for now markets are providing the growth we want.

Global Equity Investing

Over the past 8 years U.S. equities have outperformed non‐U.S. or international equities. Some of that has to do with relative economic stability, the strength of the U.S. dollar, and better growth prospects. It’s tempting to some investors to therefore over‐weight U.S. investments and chase performance. But we think that would be a mistake. The U.S. only comprises about 48% of the world’s stock market value. Ignoring international stocks means you’d be missing out on a lot of great global companies. More importantly, a trend reversal occurred in April whereby international stocks are starting to outperform U.S stocks. For the first time in 8 years, global stock portfolios are poised to outperform narrowly focused, U.S.‐only portfolios. Our iFolios models include a 60%/40% target mix of U.S./international stocks so we are already positioned as global investors. So there is nothing to do, but we just wanted to point out the change in trend and keep you apprised.

Economy – Where Are We?

As we ride the stock market trends higher, capturing steady growth, many are asking how long can it last? Based on economic data, it may last a bit longer. U.S. corporate earnings are growing again, after declining for six quarters in 2015 and 2016. According to S&P, earnings grew 5.7%, annualized, for the 4th quarter of

2016 and are on track for about 12%, annualized, for the 1st quarter of 2017 with 68% of companies reporting so far. The GDP report for the 1st quarter of 2017 was just released last week and GDP is slowing at 0.7%, annualized, but is still positive. And all of our four recession indicators (PIES – production, income, earnings, and sales) are still positive as well. One indicator we’re watching – and you can watch with us – is the unemployment rate. It’s currently 4.5%. If it rises to 4.8%, that would be a reversal of a 7‐year downward trend, and that would be a concern. We’ll continue to watch economic data, but as of today, the sky is not falling.

Do Valuations Matter Any More?

In addition to assessing the economy for clues about changes to market trends, we also consider valuation metrics. As always, we watch 1) market cap to GDP, 2) margin debt, 3) P/E 10, and 4) ValueLine MAP. And all four continue to scream “stocks are over‐valued!” Truly, all four are at peak levels similar to prior peaks including 2007, 2000, and even 1929. But readers of this Outlook know that we’ve commented about these peak valuation levels for a year! And yet, the market keeps grinding higher. All valuation levels tell us is when the market is cheap or expensive. But it does nothing to tell us when, or if, the situation will change. The valuation level does tell us the potential for a rally or correction should sentiment change. And since valuations, today, are at extreme peaks a shift in sentiment from hope/buy to fear/sell could be troublesome for stocks. But we simply are not “there” yet. We find that the very best strategy is not to guess, but to watch the price trends, directly. Every day, we watch the price trends of every portfolio holding (index etfs) and look for any price crossovers below their moving average trendline. Today, most of our index etfs are between 3% and 10% above their moving average trendline. When they cross below, and not until that happens, we will sell some of our holdings and move to safe money funds for protection. Given the valuations, now would be a terrible time to be a “buy & hold” investor. But it would also be wrong to sell today. Instead, we’ll make money, cautiously.