Seasonal marathoners like myself use the “off-season” to add to what we call our “base miles”. These training runs and accumulated miles help to build our “aerobic capacity”. Increased aerobic capacity helps the body convert fats to energy, thereby increasing our endurance.
The markets are likewise in a phase where it makes sense to add to our portfolio’s ability to endure for the long run. The markets have hit new highs at least 25 times this year. During times like these it is very prudent to position portfolios –like we condition our bodies –for the challenging times ahead.
Economy
The economy is now in its fifth year of recovery/expansion, with the S&P 500 index of the stock market gaining nearly 200% since March 9 of 2009. The four cyclical sectors: automobiles, housing, inventory, & capital expenditures, which typically drive economic expansion are generally headed in the right direction.
- Automobile Sales recently hit levels unseen since 2007, with an annualized sales volume of nearly 17 million vehicles.
- Housing starts bounced back from their weather impacted first quarter declines and continue working their way back to normal, currently running at just over one million starts versus 1.36 million average (SAAR – Seasonally adjusted annual rate).
- Manufacturing and trade inventories have been in ranges that most economists would consider to be normal levels and fluctuations for several years.
- Real Capital Goods Orders (business investment in buildings, machinery & equipment) remains at above-average levels, but not so far as to help improve long-run productivity.
Jobs continue to follow the traditional post-recession pattern, as unemployment peaks during the recession and declines slowly during the recovery, creating a chart that looks very much like a playground sliding board.
Inflation is always on people’s minds, but until consumers begin overspending (consumer debt remains at low levels) and interest-rates begin to float, we are not likely to see huge gains in inflation.
Growth in the US economy is, in my opinion, likely to continue in the 2% –4% range for the foreseeable future.
Markets
Yet as solid as the economic numbers appear, many stock market pundits would describe it as highly overvalued, because of the forward-looking price to earnings (P/E) ratios. I believe this assessment is simply not true. Evaluation must be considered in light of the facts.
Price earnings ratios are high because bottom-line corporate revenues still have lots of room to grow. I believe this will happen mainly because the consumer, after the impact of the bear market rolls-off the five-year performance numbers, will become much more confident and therefore start spending a lot more money. Consumer spending makes up more than two thirds of our economic activity and the consumer simply has not returned to pre-recession spending habits.
A much better indicator of a pending bear market according to Jeffrey Kleintop would be looking out for an inverted yield curve, which has preceded all of the past seven recessions. The FED would need to push short term rates to exceed the ten-year rates, and with conditions as they are now, it is likely to be years before we get anything approaching an inverted yield curve.
International markets tend to have additional risks for US investors. Including exchange rate, taxes, government integrity, and accounting rules. Lots of industry commentators said the time is right to begin making a play for international exposure. I believe that the European economy has most likely bottomed out, and . Emerging markets have had a very difficult couple of years, and a number of commentators have said the time is right to begin entering these markets.
Trouble spots
As alluded to above, we have some long-run concerns about productivity & labor force growth. Worker productivity gains have been lackluster, to say the least, with just a 0.5% gain in 2013. When coupled with a declining labor force, due in part to baby boomers retiring, this could prove detrimental to sustained growth in the years ahead.
With both the stock and bond markets at or near record high prices, there’s opportunity to reduce risk.
Contact us for a complimentary consultation to learn how we would position your portfolio to endure, because at Enduring Wealth Advisors, we’re focused on the long run!
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