Three Market Factors to Consider This Spring

Markets are known for their volatility, and the U.S. stock market is no different. In the past year alone, we’ve seen the S&P 500 gain 26% since bottoming out in February of 2016. In fact, 16% of that increase has occurred since the November 2016 presidential election. With this substantial growth, should we be worried about a market time-out? Here are a few things to consider when looking at the current state of the U.S. stock market:

1. Current Market Climate

There are many factors currently in play that could cause the market to head into a period where we consolidate our recent gains. For one, U.S. stocks are currently trading at around 18 times current estimates. This has stocks now trading on the expensive side when it comes to earnings. Now, stocks have seen periods with higher valuations and it can be argued that markets aren't as expensive as they seem in a low interest rate environment. However, we need to be aware that stocks are no longer as cheap as they were even a few months ago.

Secondly, if the economy stays strong and the promised tax reforms become a reality, corporate earnings could increase considerably. There has been plenty of talk about corporate tax reform and the repatriation of corporate earnings currently overseas. If these two things happen, the S&P 500 earnings could increase by an estimated 8%.

That being said, the market has been rallying for months based on many different optimistic scenarios including the two I listed above. The recent failed vote on health care illustrates that translating the new Administration's campaign promises into reality may be harder to achieve than many had hoped. This could cause investors to take more of a "wait and see" approach in the months ahead, at least until we see some clarity on the fortunes of economic and tax reform.

2. Optimism And The Market Future

Despite the impressive growth in the past year, stocks are currently overbought by our work and have been sluggish for most of March. According to CNBC, money flow into stocks has been strong all year,[1] which can sometimes be indicative of a market in need of a pause. Investors are optimistic about stocks right now. Perhaps a tad too optimistic in the short term. That is the opposite of what we saw last summer. Few were clamoring to buy equities back then when fear over the British exiting the European Union was at its highest. That turned out to be a pretty good place to be an investor. However, you had to shake off a lot of uncertainty back then and stocks ended up climbing the proverbial wall of worry for a very nice gain. It is possible that today's over exuberance is a signal that markets are a bit ahead of themselves. It is at a minimum something we'll continue to monitor going forward.

3. Seasonal Market Patterns

The third trend the market is facing is that of seasonal patterns, something we've discussed many times in the past.  We a're about to transition into the weakest time of year for stocks. Historically, stocks have faced a challenging time from April-September. Of course nothing guarantees we'll see this happen in 2017, but this pattern occurs often enough historically to give us something to be aware of in the coming months. 

What Does This Mean For You?

Of course I have no idea what the future will bring and I'd say that a period where stocks consolidate the gains of the last year or so would be in many ways healthy. It would dampen the speculative fever that has been quietly brewing and allow for earnings to catch up to the markets. Also while there are no guarantees, nothing seems to be indicative of the possibility a broader sell-off at this time beyond a typical correction. However, a historical correction would have the potential to take stock prices down anywhere from 5-15%. Being aware of such a possibility allows us to prepare different portfolio strategies or emotionally prepare clients against such an event and to also make any adjustments based on a client's risk reward parameters.  It is also possible that stocks will continue to move higher in the coming months. Bullish surges can last longer than investors think. Right now Wall Street is full of the tarnished reputations of those prognosticators who have claimed the end of this move higher. Finally I would note that stocks can also correct by time, as in going nowhere for a certain period, as well as price.

I don't want the take-away from this to be that I have become bearish of stocks. There are many reasons that I have discussed in the past why I am longer term positive on the markets and the economy. But there are longer and shorter term patterns to markets and we are always weighing the evidence when trying to discern market direction. Right now we are in the pay attention mode. Probability would indicate a higher likelihood of a struggling market or perhaps a slight correction but there is little real evidence of that yet. It is also possible that stocks will toddle along for a few days or weeks before finding their footing and continuing the bullish advance. But there is enough little subtle changes that make me think we should perhaps be ready in case we see a change in the market's dynamics. With this in mind, we can prepare ourselves emotionally and plan for different portfolio strategies in case we experience some rougher waters in the months ahead.

If you are concerned about your portfolio or have questions about how market trends will impact your long-term financial plan, call my office at 708.488.0115 or email us at lumencapital@hotmail.com. Our goal is always to ensure that your portfolio is aligned with your investment goals and risk level, regardless of what the market is doing.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing him at lumencapital@hotmail.com.

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[1] http://www.cnbc.com/2017/03/02/etf-investing-grows-as-money-moves-into-stock-market.html

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

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