Impeachment, trade war with China, Iranian aggressions, looming Brexit, an inverted “yield curve” that might signal recession, ballooning debt – investors have plenty of concerns today. Yet the economy has so far kept powering on, interest rates and inflation each remain low, and this year through 9/30, the stock market has been unusually strong. However, that strength is basically recovering from weakness in last year’s 4th quarter, and the stock market is still hovering near the high it made just over a year ago. Additionally, stock market strength has been unusually narrow. Moreover, stocks in the third quarter essentially marked time. And in what is generally considered a positive for stocks, after nearly two years of raising interest rates (from nearly zero), the Federal Reserve this year has lowered rates twice.
Value stocks have lagged growth stocks for some time, so it is of particular interest that we note a small turnabout as value stocks did just a bit better than growth stocks in the third quarter – not nearly enough to make much of a dent in the large outperformance of growth over value in the year’s first six months, but this still gives some hope of the market’s long-anticipated return to rationality. However, international stocks still lag domestic stocks, and we would think a reversion to the mean in that regard should also be likely to be part of a significant market shift.
Seasonally, stocks are often weak in October and finish the year stronger in November and December. We’ll see if that pattern persists this year.
Valuation for US stocks remains high by some of the most historically accurate measures (such as the “cyclically adjusted price to earnings ratio”) but appear reasonable when compared to historically low bond rates. Long-run returns appear likely to be below the stock market’s long-run historical average, but ahead of the returns currently offered by bonds or cash. The priciest and most popular growth stocks are much more expensive than the market overall, and therefore riskier, but we are finding other stocks at reasonable valuations in which to invest. We will continue to regularly rebalance and widely diversify to help mitigate risk.