August Market Update by Jack Moller

Quiet Market as Leadership Reshuffles

While last month’s market might be called anything but interesting with most participants seemingly taking an August vacation, under the surface some intriguing shifts seem to be taking place.  It may be a bit too early to say any type of trend is in place, but perhaps … I wanted to mention a few things that pique my interest.

“Aged” U.S. Stock Bull Market Continues to be Unloved

We are now well into our eighth year of this remarkable bull market that began in the depths of the panic way back on that wild March 9, 2009.  This bull market is getting old!  Nonetheless, in my 25 years in the advisory business and over a decade following/trading markets before that, I’ve never seen such strong performance greeted with such lack of interest.  As long as a couple of key characteristics stay in place, the bull market may continue a bit longer (notwithstanding the possibility of a mild correction at any time).

1. Bull Markets Love to Climb a “Wall of Worry”.  This adage seems to continue to hold as even the slowest post-war economic recovery following the worst recession since the 1930s can’t seem to dent the bull run.  Liz Ann Sonders, Schwab Market Strategist, regularly cites John Templeton’s view of market cycles quoting “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” I can’t think of anyone who would believe that the current market mood is euphoric, or maybe even optimistic.  This indicator alone might indicate that the market has more room to run.

2. Markets Love Liquidity.  As I, and many, many others, have written, we are in uncharted territory with the great monetary experiment of unprecedented central bank economic intervention.  While no doubt this is creating economic distortions that may come back to haunt us, with interests rates pretty much at 0% (and actually negative on trillions of euros/yen/francs … overseas) the monetary spigots are certainly wide open.  Heck, even in the U.S. our federal reserve is struggling to raise rates much above ¼%!  Most bull markets seem to end when liquidity is drained from the economy typically through higher rates.  It seems we may have quite a ways to go before we see that.

Beaten Down International Markets Recovering

While the S&P 500 index has risen relatively unimpeded (despite a few sharp hiccups of 10%-ish declines), virtually all other markets have suffered bruising bears and not enjoyed nearly the recovery of the S&P.  This has been a rare period when the markets don’t reward those who diversify.  I include this chart of rough estimates comparing the recoveries in many markets (using prices as of 8/31/2016).

A number of things come to mind as I look at these performances (note for simplicity, I have not included dividends which would certainly enhance these returns):

1. In looking at the price change since the pre-crisis peak, we see that only the U.S. markets have actually fully recovered and the REITs just barely.  I might also point out that the S&P 500’s 2007 high was very close to its 2000 high in the midst of the dot-com boom.  Thus, it’s probably only appreciated about 50% in 16 years!

2. The international and natural resource markets have never fully recovered to the pre-crisis peaks and many are off over 20% from their post-crisis recovery peaks!

My point in putting this together is that while the U.S. markets may be overdue for a breather, many international markets have undoubtedly gotten cheap and may represent real value.  In the past few months, we’ve seen what might be the beginning of some market recoveries overseas.  Diversification outside the U.S. may very soon start to pay off.  Time will tell.