Originally posted on August 11, 2016
Over the last few weeks the major indexes – S&P 500, Dow and Nasdaq – continue to break record highs. The obvious question becomes, “Are these lofty stock prices sustainable and what’s the markets’ support for these valuations?” By most technical averages, the market today is more overvalued than at any time since 2007 and, in the case of some indicators, 2000.
On the surface, there are tidbits of positive economic news. The jobs report for July was better than expected, and consumer spending grew at a good pace for the third straight month in June affirming an upbeat outlook for the economy. However, for every good data point, there’s been less than stellar economic news to offset it. As stock prices continue their upward climb, corporate earnings for companies in the S&P 500 are down 3.50% for the second quarter and are expected to be 5% lower for the third quarter. Because of this, American companies have cut corporate investment for three straight quarters.
Economic growth is now tracking a 1% rate for 2016. That makes the annual average rate of 2.1% GDP growth since the end of the recession, the weakest pace of any expansion since 1949. Additionally, the economic outlook outside of the U.S. remains very weak and represents a potential drag on our economy.
In view of this contrary data, there are many professional money managers and investors who currently have a negative view of both the stock and bond markets – we are part of this group. The economy is entering its traditional soft period (Aug, Sep, Oct) where economic growth is generally muted and financial market performance is historically weak. As we’ve said throughout all of our correspondence over the last 12 months, we remain cautious and defensive in our guidance with respect to portfolio allocations.