It’s pretty obvious that markets are having a good year – so far. As a matter of fact the ‘market’ as measured by the S&P Index, is up about 5% for the year. That’s a lot of gains in a short time. It’s an ‘annualized return’ (which means that IF it continued at that rate of growth for the rest of the year) of 98%!  So, common sense tells us that the market cannot and will not continue at that rate for the rest of the year. Bottom line, the rate of growth must slow down. But there are some clues as to the general potential future of the markets for this year.

In a ‘Bull Market’ (very positive up market) the pullbacks tend to be short and not very deep. A good example of this was yesterday’s S&P* market action. The S&P Index did manage to dip down by about 0.6 % (that’s six tenths of one percent) within the first couple of hours of trading time. Traders, however, watch for these dips in a bull market, and see the current price as cheap (vs. what the price was a few hours ago) and swoop in and buy. The extra dollars buying the shares push the market valuations back up, and by the end of the day the S&P was almost right back to where it started the day. Again this is classic bull market behavior. Traders watch for pullbacks and buy on the pullback.

Another clue – we have had a number of new ‘highs’ in the main indexes. Highs are a symptom of bull markets. One does not see a new high in a poor (bear) market.

Then there’s small business optimism. As I have mentioned from time to time, because small businesses contribute so much to employment and the growth of our economy — when small businesses are optimistic — markets tend to do well. This optimism can be tracked by watching the ‘Small Business Optimism Index’ which is compiled monthly by the National Federation of Independent Business. The SBOI (optimism index) edged up 0.1 points in January to 105.9, resulting in the highest reading since December of 2004. Pretty great, but the real story is the gain in December when the index surged 7.4 points- the largest increase in the history of the survey. This data suggests that markets will continue in a positive vein for a time.

One last clue – one that you may recall my discussing back around the middle of 2016 summer – markets were looking good overall but the strength was in the ‘defensive’ areas of consumer staples and utilities. Those are the areas people invest in when they are worried about the future. Today we have an entirely different makeup to the markets. The strength today is in the areas of Industrials, Finance, and Technology. These are considered to be the ‘aggressive’ areas of the markets. People invest in them when they expect good market results. So once again, this is a clue that markets are likely to continue in a positive note.

No one knows when markets will turn negative, but it is the nature of markets to bounce from positive to negative. However, for now, we’ll follow this quote by Werner Erhard:  ‘Ride the horse in the direction it is going’.  In other words, markets are positive and appear to have enough strength to continue in a generally up direction for a while. Let’s enjoy it while it lasts.

Market Minute 2/17/2017 – What Would Buffett Do? 

Few people will argue with me if I suggest that Warren Buffet is one of the greatest investors of all time. He has stated that his favorite holding period is ‘forever’, and many people seem to remember that bit of wisdom as a key to his success. It would seem to be in contrast to the comments you’ve heard us make regarding moves to hold the strong sectors and ignore the weak ones.  

This past week I noted a story regarding Berkshire Hathaway’s (Buffet’s Mutual Fund) sale of Walmart stock. The article reported that he has now sold most of his holdings with the current sale being approximately $900 Billion. I note that over the past 12 months Walmart (WMT) has been up about 7% while the NYSE index* has been up about 22%.  Apparently, after a year of trailing his benchmark index, Warren also lets go of a weak holding.  From some other stock indicators, it looks to us as if he’s adding technology to his portfolio.  That’s a move to replace a weak area with a strong one. Seems like a good idea.  

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.