Download q1 2017 global market update

Q1 2017 GLOBAL MARKET UPDATE
Do Trees Grow to the Sky?
“Don’t try to buy at the bottom and sell at the top.
It can’t be done except by liars.” - Bernard Baruch
The most common question we’ve been asked recently
has been “is it too late to be putting money into the
market?” After all, this bull market is in its 96th month
and is the fourth biggest since 1928, gaining over 250%
since the March, 2009 bottom.
Yes, it’s frustrating to think about missing the 10%+ move since the election, especially if you’ve
been waiting for a correction. Should one sit on the sidelines and wait for the inevitable
pullback, or will the market run up another 10% before that happens?
By now, most of our readers know that we believe timing the market is a fool’s errand. Markets
frequently act in ways investors don’t expect. The key to successful investing is to focus on the
facts and don’t rely on predictions and forecasts. How many experts accurately predicted
Brexit, the US presidential election result, or even Leicester City winning the Premier League?
Our investment philosophy relies on what we know, not on what we think we know.
What we know is that the US stock market has averaged an annual rate of return of 8.38% for
the 20-year period between 1996 and 2015 which included such dramatic and volatile periods
as the dot-com bust and the subprime mortgage crisis. If you tried to time the market at any
point in that 20-year period and missed only the top 10 best performing days, your annual
return would have dropped to 4.91% (source: Morningstar/Legg Mason, 2016). Staying in the
market is a better long-term strategy than trying to predict the market.
We also know that most of the conditions that usually signal the aging of a bull market are
simply not present right now. For example, the small investor usually piles into the late stages
of a bull market. To date, that has not happened as evidenced by mutual fund flow data. Since
the market bottom in 2009, there have been $1.5 trillion of bond mutual fund inflows while US
stock funds have seen $160 billion of outflows. An increase in mergers and acquisitions and
IPOs are also reliable markers of the later stages of long-term bull, but activity in those areas
has been subdued (according to Renaissance Capital, the 2016 IPO market hit a 7-year low).
But we also know that interest rates are beginning to move higher again after an extended and
distorted period of what has become known as “financial repression,” (i.e., a period of
extraordinarily low interest rates intended to stimulate borrowing and economic activity but with
the insidious side-effect of penalizing savers.)
Page 1
We are now entering what appears to be a more normalized business cycle where we
transition from an economy driven by monetary policy to what Washington promises will be a
robust fiscal policy hopefully resulting in higher business spending, more jobs, and a continued
economic expansion.
2.
3.
4.
So we appear to be moving from a period of uncertainty to a period of positive uncertainty.
With one party controlling the White House and all of Congress, the outlook for regulatory and
tax reform holds more than a glimmer of hope (although their recent attempt to repeal and
replace the ACA wasn’t a resounding fulfillment of this hope). One thing appears certain:
Washington will do whatever it can to champion a pro-business agenda over the coming year.
This is rarely bad for markets.
So this brings us back to the original question of whether or not trees can grow to the sky. The
simple answer is found in our decades of battle-scarred experience and the resulting wisdom:
the market pendulum always swings too far to one side before reversing course. We don’t
think we’ve yet seen the excesses consistent with the end of previous bull markets, and the
market has already weathered an earnings recession in 2015-2016. What we do know is that
our primary job is to control risk for our clients. We will continue to monitor the hard global
data, the political environment, and other factors that could signal the pendulum nearing the
end of its trajectory.
We will do this by continuing to stay globally diversified, holding an appropriate mix of US and
foreign stocks, bonds, and other assets that will give our clients the best chances of preserving
and growing their portfolios over time.
ClearRock continues to seek alternative sources of value for our clients. One such strategy is
represented by the launch of our new Policy Opportunity Portfolio (“POP”), an “enhanced
index” approach to investing in the market through a unique strategy seeking to capitalize on
the US companies who successfully and most intensely lobby Congress. For more
information, please contact us.
As always, we appreciate the confidence you have placed in us and will continue to earn your
trust every day. We welcome your comments and questions.
-The ClearRock Team
877.726.8858
I
[email protected]
I
www.clearrockcapital.com
Page 2