Recent Letter to Clients {Part I}

I'm going to be releasing in my next posts my most recent letter to clients.  The question and answer format seems to be popular with readers so I’ve decided to continue with that mode.

Stocks have gone nowhere for some time now.  Why is that?

As a firm, we use the S&P 500 when we talk about “the market” because it is highly representative of US stocks. We can see with the benefit of hindsight that the market has been trending sideways and locked in a trading range since November of 2013.  The S&P 500 has traded roughly within a 15% range over that period.  Included above is a recent chart of the S&P 500’s ETF, SPY.  You can double-click on the chart if you want to make it larger.   I’ve noted and marked two bands, each in yellow on the chart.  The top tier approximately marks the outer limits where stocks have found sellers since early 2015. Investors have said by their trading  up till now that valuations in that upper zone are too high and markets have sold off each time stocks have tested that range.  Slow economic growth and flat corporate earnings have meant that above this shaded area investors don’t seem to find value. At the other end, stocks have found support each time they’ve approached the lower yellow shaded price range. The reason stocks seem to trade higher after each selloff can likely be attributed to historically low interest rates and the belief that there really are few alternatives for liquid assets right now.  Let’s face it, for most investors getting close to zero interest in savings accounts isn’t really that attractive.  The S&P 500 at least right now pays close to 2%, better even than a 10 year US Treasury bond.  Lower rates may be one of the primary reasons stock prices have been able to sustain their current prices.  Also, stocks might not appear to be so expensive if earnings start to accelerate in the coming quarters, which some analysts are starting to suspect might occur.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note positions can change at any time.

Part II will be posted tomorrow.