Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group
Only data will tell.
In a quest for evidence that warning signs in the market are flashing, I have come up empty handed. This does not mean becoming flighty, but to look at evidence and try to decide if there is any new information could lead to a hypothesis about the market – then try to disprove that hypothesis.
We do just this. We test hypothesis based on the scientific method to continually test models, market predictions and theories. It is the only way that we can make sure that we are making the most informed decisions for our clients.
There is a current hypothesis posed by “market gurus” that the market has reached its apex. Has it though? All of the evidence which we hear presented in favor of this argument have merit:
- Stock forward PE ratios are very high, and according the Ned Davis Research calculation, are now at 25.6 (as of 12/31/2017). That places it clearly in the overvalued category.
- We are setting a record. We are now at day 296 where the market has not even had a 3% pullback.
- Unsupported comments are adding fuel to unnecessary emotional fires. Many have asserted things like, “money is pouring into the market, and that could mean a bubble!” I have not seen any convincing evidence to support such comments. It may exist and develop, but so far, I do not see anything like runaway borrowing to invest capital, inflation that is above trend or Fed members talking about an overheating economy.
- The yield curve flattening is also one that has been thrown out there, and we have even discussed it some, so I won’t go into that too far.
These hypothesis have some merit, but the question is, do they outweigh other pieces of evidence? To examine that question I must do my best to remain unbiased and not allow emotions to get in the way.
There are lots of economic reports worldwide that help paint a picture of the economy. Market Cycle theory tells us that the stock market performs well when the economy is growing, up to the point that central banks begin to restrict cash flow in the economy by raising interest rates to the point where investment slows.
Since the Prime Rate is one of the real interest rates affecting consumers, I wanted to know what the average Prime Rate in the US was. According to www.fedprimerate.com, (which uses the published prime rates from the Wall Street Journal going back to December 1, 1947) the cumulative average US Prime Interest Rate is 6.9939%. The current US Prime Rate from December 14, 2017 is 4.5%. Clearly the current rate is lower than average by nearly 2.5% or approximately 35%.
If interest rates are not slowing the rate of investment, the next question asks whether the economy is shrinking, growing, slowing or accelerating. Looking not only at the US but on a global scale, the economy is growing.
When we consider indicators such as Manufacturing PMI, unemployment, real GDP, production etc., all together they tell a very important story. They tell us that the economy is growing faster than average for expansion.
With the amount of improvement and expansion, it is hard to argue that the global economy is not growing robustly. There are always things to continue to watch, and just because the current reading is positive, it doesn’t mean that things can’t change. For now, there is no indication that the end is coming soon.
The alternative hypothesis is that the economy is not yet peaked and that there is more room to grow. How much? Tested or not, no one has that answer. Unless they have a crystal ball of course.
With all of this said, I will say that you should always weigh the pros and cons of making changes to your current investment strategy. This includes investing “idle cash.” Chat with your advisor and try to really understand what you are trying to achieve, which options are best for your specific needs, and whether now is a good time for you to change what you have been doing.
Hopefully this commentary helps at least address some of the popular news topics and helps you look at the data as one element to your decisions rather than relying on your gut feeling or another guy’s.
If you missed it, you can also watch our previously recorded Market Update, which I hosted just this past week. This presentation can also help shed some light on the current economic situation. Enjoy!
Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 18-14