Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
The Beat Goes On
U.S. indices move to hit new records
Last week as the Dow Jones Industrial Average reached yet another historic high and closed above 23,000; we were asked what we attributed the latest move higher to.
Curiously the benchmark reached a record high on its 30th anniversary of the crash of 1987—the day when the Dow had tumbled nearly 23% in one day (see last week’s MSRS for our recollection of that time).
Last week as the Dow Jones Industrial Average crossed through yet another historic high to close above its prior high on Friday we were asked what we attributed the latest move higher to?
We responded that in our view what has driven the Dow as well as other major indices higher this year is a confluence of occurrences and trends led by what appears to be the beginning of a capitulation by many skeptics, disbelievers, and bears who have denied the veracity of the fundamentals that have supported the bull market for some time now.
Rather than “a relentless climb higher” as some have said, we would suggest that what we have been witnessing is a continuation of a bull market supported by improved fundamentals stateside, evidence that the stateside expansion is likely sustainable into the foreseeable future at a rate of economic growth of around 2 to 2.5% annually without agenda stimulus and that is what has enabled the bull market that emerged from the depths of the financial and housing crisis to continue climbing a wall of worry for more than eight years.
It’s not so much that things are substantially better but rather that they have persistently improved over time.
Conversations with clients who are invested and have been invested in the markets for some time since the markets’ earlier rallies show concern or even worry as to when the market might correct rather than signs of euphoria, irrational exuberance or hubris.
At the same time we have been receiving calls from private and professional investors who have kept cash earmarked for investments on the sidelines for years and are now asking if there is still opportunity to invest in the equity markets.
“It’s not so much that things are substantially better but rather that they have persistently improved over time”
We respond to them that we believe that there is likely further upside for stocks but probably not in a straight line— so long as the US economy continues to improve—as corporate revenues and earnings grow along with an added but uncertain potential for a stimulus boost should tax reform (or at least a tax cut) and infrastructure spending become realities.
A competitively-priced dollar should add support for US multinationals as well while economic recoveries abroad fuel demand from abroad.
For investors seeking opportunities outside of the US we would suggest a global approach that would include consideration of stocks (or stock indices using ETFs), providing exposure to both developed and emerging markets as well as to frontier markets. (See our global asset allocation model on page 9 of this report)
For US investors a significant portion of the gains had from foreign stock holdings have come from the effects of a weaker dollar against an array of foreign currencies, which has boosted and enhanced returns when translated into US dollars. (See the chart below which illustrates and compares the local currency and US dollar denominated returns year to date across a wide array of foreign indices. The difference between the local and the foreign currency boosted returns suggest to us that the gains in local currency signal rallies seen thus far in foreign markets that could be in their early stages).
Should the economic recoveries that are currently taking place abroad continue and evolve into sustainable economic expansions, foreign stocks could have further to go.
Where’s the money?
One area of the investment marketplace in which we perceive the likelihood of the existence of animal spirits and irrational exuberance is around the surge in the price of Bitcoin, which last week hit a new high. A glance of a fiveyear chart of the dollar price of Bitcoin reminds and worries us that “trees don’t grow to the sky though at times they may appear to.”
Even as a number of major banks have shown an interest in block chain mechanisms and the possible applications of same in payment platform mechanisms, others (including ourselves) persist weary about Bitcoin and other cyber currencies that now are vying for investors’ attention.
We suggest that “caveat emptor” (“buyer beware”) remain a mantra for investors tempted to gamble in that space. With no apparent patent on the bitcoin system in existence and not even a certainty as to who was the creator of the currency, we remain wary observers for now.
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