A couple of weeks back this newsletter devoted most of its space to the thoughts of economist Brian Wesbury on why the markets may, or may not, be overvalued. In case you missed reading it, here’s a quick summary: In the large view, comparing equities to other benchmarks and also to a broader history, equities are closer to being fairly valued than overvalued. Of course, that is an opinion and not a promise. In recent days market pressures have been running pretty negative so naturally we wondered how Mr. Wesbury sees the situation. Here’s the latest from Brian:

BW: “Not long ago, many investors were kicking themselves for not investing more when the stock market was cheaper. But when stocks fall, like they did last week, many investors have a hard time buying for fear stocks may go lower still. Who knows, maybe they’re right. We have no idea where stocks will close today, nor at the end of the week. Corrections (both small and large) happen from time to time. In hindsight, many claim they knew it was coming, but we don’t know anyone who has successfully traded corrections on a consistent basis – we certainly won’t try.”

We’re also skeptical when analysts try to attribute corrections to a particular cause. It’s a basic logical flaw: post hoc ergo propter hoc. Because the correction happened after a certain event, that event must have been the cause. But important news and economic events happen all the time. Sometimes the market goes up afterward, sometimes down, and similar events at different times have no discernible impact.”

OK, we thought, fair enough. But isn’t the interest rate action by the Fed at least partially to blame?

BW: “…according to futures markets, the outlook for monetary policy has barely changed. The markets are still pricing in a path of gradual rate hikes and continued reduction in the size of the Fed’s balance sheet.”

“In recent years alone, we faced the “Taper Tantrum” and calls for a fourth round of quantitative easing. And remember when the Fed first raised rates and then announced it would reduce its balance sheet? Each time, analysts predicted the apocalypse was upon us – that a recession and bear market were right around the corner. How did those calls pan out? Exactly, they were wrong, and this time looks no different. QE never lifted stocks, taking it away won’t hurt; and interest rates are still well below neutral. The biggest pain has been felt by those who followed the false prophets of doom.”

Well, what about the Tweeter in Chief? Hasn’t Trump’s Tweets made people nervous?

BW:”If this were any other president, we’d be concerned, as well. But we  all know Trump isn’t the kind of president to hold his opinions close to the vest on any topic. If he thinks it, he says it. Please take his comments on the Fed in that context. That certainly seems to be what Jerome Powell is doing. The bull market in equities that started in March 2009 isn’t going to last forever. But we don’t see anything that’s going to bring it to a screeching halt anytime soon.”

We appreciate Brian’s allowing us to pass along his thoughts to you. And we should add that we find little to disagree with.

Meanwhile, it is really hard to find much to complain about amidst the myriad data points in the underlying economy. Among ones looking less strong are some who may have suffered some storm damage from hurricanes Florence and Michael. Contrarily, one of the brightest is the ratio of job openings to unemployed people. When the most recent recession began (December 2007), the ratio of unemployed persons per job opening was 1.9. At the end of the recession (June 2009), there were 6.1 unemployed persons per job opening. Today the number is 0.9, meaning there are more available jobs than there are unemployed people to fill them.


Market Minute – A Day at the Beach

Next time you’re at a beach take time to watch the waves – there is a useful investing lesson to be observed. You’ll note that the waves roll in and out rhythmically – all day long most of the time. The incoming and outgoing waves are a short-term pattern. However, if you stay long enough you may note that there is a longer-term pattern at work as well. You’ll note that the waves roll in much closer to the shore, either early or late in the day depending on the season.  This rhythm (the tide) is a much slower rhythm than that of the waves. 

There is a similar action to be observed in the stock markets. The broad uptrends can be likened to the current ongoing bull market that has been with us since 2009, and the broad downtrends (like 2008) can be likened to the occasional bear markets that are a part of investing.

This past couple of weeks saw a change in the shorter-term trend, and on a shorter-term basis markets are currently trending down. By my count we have seen five shorter bull markets and five shorter or intermediate bearish markets since the change to the current long-term bull market in 2009.

These intermediate term pullbacks are just a part of the investing process. And when they do occur — like now — we normally remove some of the stocks from our client portfolios (because the risk element is typically higher during a pullback) and watch for indicators to tell us that the bull has resumed. It is not possible to know the timing on these changes, but it is possible to reduce risk when we observe the change to a downturn.

During these times it’s important to note that the big picture (the tides or the bull market) is still very much intact, and not get too stressed over the intermediate waves. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

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