September: Here’s To Your Wealth
After some August doldrums, September is witnessing a return to higher stock market volatility. While it’s probably prudent for long-term investors to stay the course and not get too fancy with market timing, for those with shorter time horizons or lower risk tolerances it might be prudent to carefully examine what is inside their investment portfolios.
We are looking at four main areas of concern:
- Weakening global economies. In June, The World Bank downgraded its 2016 global growth forecast to 2.4 percent from the 2.9 percent pace projected in January. This slow global economic growth continues despite the massive easing by Central Banks around the world. This continued slow growth puts into question how effective low interest policies are for long term economic growth.
- An uncertain Fed leaning towards hiking rates. While we don’t see the Fed embarking on a frequent and sustained rate hike trajectory, the jitters the market exhibits when any Fed Governor speaks reflects investor concerns with how any rate rise will affect stocks (in the short run). Interest rate hikes may also strengthen the dollar which we feel can negatively impact exporters and slow our domestic economy. But in the long run, we view any Fed action to restore a more normal structure of interest rates as something that will be healthy for the markets. Rates around the world are near all-time lows and yet the world economy is stagnant. Just look to Japan to see how effective 30 years of low interest rates has been for their moribund economy.
- A fully valued – or even overvalued – stock market. Price to Earnings multiples, also known as P/E ratios are above historical market averages. For example, the P/E ratio on the S&P 500 index is approaching 25. This is well above long term historical averages which are in the 17 range. Price to Book ratios (P/B) are also inching up and stock prices of the S&P 500 index are now approaching 3 times book value (versus below 2 coming out of the 2008 decline). To clarify, the P/E ratio is the price of a stock divided by the company’s earnings per share, while P/B ratio is a company’s stock price divided by the book value per share. We expect valuation metrics such as P/E and P/B ratios to inflate as stock prices run-up, but these levels may indicate that the market may have run up a bit too far.
- Uncertainty with our elections. There are several scenarios the markets will not like regardless of who is elected. If Trump is elected, we face a high amount of uncertainty. Consistency in policy hasn’t been a hallmark of his candidacy so Wall Street doesn’t really know what his policies will be. If he pursues trade wars with China and Mexico that may not be good for stocks. Furthermore, the polarized nature of his candidacy will make unity difficult and we may continue to have divisiveness and gridlock out of Washington.
Alternatively, If Hillary is elected in a landslide and the Democrats take the Senate, Wall Street could be looking at an empowered left. Hillary has had to appease the far left in her party (the Bernie Sanders voters) and that voice will be echoed in Congress by Elizabeth Warren. Some of Warren’s rhetoric and proposals are far to the left of just about anything we have seen in our countries history and reflect more of what we have seen in failed socialist countries. The U.S. stock market, particularly financial stocks, may take a hit if Hillary doesn’t legislate more from the center.
However, there may be mitigating factors to these scenarios coming out of the election. For example, Paul Ryan the likely Speaker of the House in 2017, has kept his distance from Mr. Trump and as a result will not be beholden to his policies. And the incoming Democratic Senate Leader, Chuck Schumer, is from New York and he has been friendly to Wall Street in the past.
All this uncertainty leads us to have some concern about the near term performance of the stock market and other risky assets like high yield bonds. Investors should review their portfolios to see if their investments are aligned with their true risk tolerance and remember that stock market investing is very difficult to time in the short run and that a long term perspective is usually needed to look past periods of uncertainty.
Mark Avallone, MBA, CFP®, CRPS®. www.PotomacWealth.com
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
Securities and Investment Advisory Services offered through H.Beck, Inc., Member FINRA/SIPC. 6600 Rockledge Drive, 6th Floor, Bethesda, MD 20817 301.468.0100. Potomac Wealth Advisors, LLC is not affiliated with H.Beck, Inc.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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