Last year at this time the S&P 500 was recovering from one of the worst starts to a year in history and this year it is off to one of it’s best starts. Furthermore, as I write this, the first day of March is providing the largest gains of 2017.
While the US market continues to establish new record highs, the real head scratcher for me is the lack of volatility. The Dow Jones Industrial Average just ended a streak of 12 consecutive record closings. That has only happened two other times in the last 120 years. Even more surprising is the S&P 500 Index has gone over 90 straight days without dropping more than 1% in a market session.
Politics aside, markets seem to be embracing the administration’s goals of sharp tax cuts for corporations and individuals, reduced regulation and a $1 trillion spending proposal on infrastructure. Now this is where things get a bit tricky. If the market is “building in” pricing based on these potential events what happens if they don’t come to fruition? This could be many months or years down the road but it is still something we think about.
John Maynard Keynes said, "The market can stay irrational longer than we can stay solvent." Markets are forward looking mechanisms and at present seem to be pricing in the new administration’s plans. Some say it is extremely overvalued and some say there is plenty of upside left to come. These differing opinions are what makes the market. Remember for every buyer there is a seller.
Obviously there are many questions still to be answered. While reducing taxes and boosting infrastructure spending sounds favorable, the question remains how will this be financed? Reducing government inflows (taxes) while boosting spending can lead to further deficits and cause severe economic damage if economic activity doesn't accelerate fast enough. Furthermore the Federal Reserve seems very confident on raising rates multiple times in 2017 and that increases borrowing costs for corporations and governments. The last 10 years the global economy has become accustomed to ultra low rates and we have to see how the economy handles multiple rate hikes.
I’ll probably keep saying it throughout my career but our opinion remains that the “answer” to the unknown in markets is a risk adjusted globally allocated portfolio that takes into account taxes and fees.