Monthly Outlook: September 2017

August was a typical summer month – not much going on in the markets. Of course, valuations remain sky-high for stocks but investors seem content to hang in there until something breaks. There are some concerns brewing (more on that later) but for now, we’re staying invested and watching very carefully. Rest assured that we look at every position every day so we won’t miss any trend changes. That’s what we do, so you don’t have to. Let’s take a look at the numbers for last month. For August, U.S. stocks (Russell 3000) were basically flat, up just 0.1%, international stocks (FTSE All-world ex-USA) inched higher by 0.6%, while bonds (Barclays Aggregate) did the best, up 0.8%. All markets (US stocks, int’l stocks, bonds) remain in an up-trend (above their 200-day moving average) so the right call is to stay invested for growth. And so we are, holding very little cash.

Valuations Remain High

In the long term, valuations matter a lot. In the short term, they mean almost nothing. That’s the paradox of investing. Do you focus on value or price? The price you pay for any asset is what ultimately matters considering the goal is to pay a low price today and sell it at a higher price (and maybe collect dividends along the way) later. But assets never really trade at their “fair price.” Rather, they sell for too little in times of fear and too much in times of hope and exuberance. But turning the tide of hope and fear can take a long time, sometimes years. Valuation metrics can tell us if we’re close to an inflection point. We know from decades of history that stocks have traded within a broad range of valuation levels. When they’re at the high end of many valuation ranges, some catalyst has always occurred that shifts sentiment from hope to fear and prices decline, often by a lot. Conversely, low valuations combined with a positive catalyst result in higher prices. High or low valuations – without a catalyst – are not a problem. Here’s the whole point: At least for stocks and bonds, we can watch daily price trends and moving average cross-overs for evidence that a catalyst has occurred. We don’t have to guess and we don’t have to be nervous. We just have to be vigilant and disciplined.

Catalysts and Indicators

The best indicator is the price trend, itself. It always amazes me how many investors and analysts want to study and over-analyze esoteric factors with hopes that they’ll uncover some early indicator about what prices will do. Unlike looking directly at the sun during an eclipse, we can look directly at prices and their trends. And they all remain “up” for now. If we had to look at other indicators for clues about trend changes, we’d suggest the following: 1) watch for the unemployment rate to rise above its moving average. That would be a rise from 4.4% today to about 4.6%. 2) watch for high yield (junk) bonds to underperform investment grade bonds and 3) look for the % of stocks in the S&P500 trading above their 200-day moving day average to sink below 50%. And guess what? None of these indicators have yet occurred (indicating a sell signal) either. So whether we look directly at price trends or at “clue” indicators, the message is we need to stay invested – for now.

iFolios and Variable Allocation

We want to take this “stay invested” moment to remind our investors of how our iFolios strategy works. We have a range of models from 100/0 to 0/100, indicating your mix of “growth” and “stability” assets. Our most popular model is “iFolios 75/25.” This means your target and benchmark is 75% growth (stocks) and 25% stability (bonds). This is the mix we’ll strive to beat. But the key to our strategy is that we are not locked into 75% in stocks. That’s just our maximum allocation. When stocks start to downtrend, we will sell down to a pre-determined minimum (typically 40% of your target) to protect from significant loss. So an iFolios 75/25 investor will have between 30% and 75% in stocks, depending on the trend. That variable allocation is what allows us to provide the growth and protection that you want and need. If you have outside portfolios that you would like us to review, now might be the time to do it.