There is an old saying that April showers bring May flowers. Well, if you look outside most areas in the northern U.S., you’re seeing snowflakes! Therefore, it is reasonable to infer that April snowfall creates dead flowers this May!
I guess the weather is fitting for the climate in the investment markets and the economy. After a long bull market run that has acted as a rising tide that has lifted almost all investments, now is the time to be more selective in your asset allocation process.
If your portfolio allocations are heavy on the equity portion due to the run-up of stock prices, you should consider how exposed you want to be to equities if there is a major downdraft or extended period of underperformance.
Markets hate uncertainty. Right now, there is plenty of uncertainty in many parts of the economy. Potential legislative and fiscal policy gaffes, possible trade wars, higher interest rates, high valuations in speculative investments and a relatively mature business cycle all lead to serious questions about how much room is left in the bull market.
Despite the recent correction, the U.S. equity markets still lead all major global markets in terms of valuation. While it would appear to be positive, it is also a sign of extended risk. The outlook for earnings has theoretically improved due to tax reform and other recent fiscal policy measures, but even with that boost, earnings do not support these valuations.
Moreover, if the recent tax cuts fail to “trickle down”, there is a real threat that consumers are not going to have money to purchase higher priced goods and services. This could also put the brakes on housing affordability and other real estate activity – especially if interest rates edge higher.
The scary thing about the fabulous bull market run since 2009 is that many consumers have had to draw down whatever savings they amassed before the multiple stock market corrections beginning in 2002 and they have run up credit-card debt to keep up with the basic necessities of life. Consumers are once again heavily leveraged with sub-prime auto loans, mortgages, and student debt. Furthermore, surging health care, rent, food, and energy costs will only continue to impede economic rates of growth.
Meanwhile, corporations continue to opt for share buybacks, wage suppression and accounting gimmicks to fuel bottom lines earnings per share.
This isn’t a formula for strong economic growth.
The biggest problem that I have seen developing over the last ten years is that it isn’t a severe correction or crash in the financial markets that has me worried, but the ongoing structural shift in the economy that is depressing the living standards of the average American family.
One thing is for sure, the easy money has already been made. Now it’s going to be a lot harder to make money in the markets and you better make sure your appetite for risk is appropriate for your investment time horizon.
If recent weather patterns tell us anything, it is that we should always be positive but still be prepared for the worst.