Thoughts {09.12.18}

We discussed back in early July the potential for some headwinds to hit stocks this summer.  Instead the S&P 500 went on to hit new highs.  It is currently up a bit over 9% for the year and is up around 6% since I put out that comment.  The purpose of that column was to point out the potential for a more volatile period for stocks.   I pointed it out then so that investors would do what they should be doing {and what we are constantly doing for clients}, which is to " go over portfolios and review your risk profile.  I am still longer term bullish on markets as I am longer term bullish on our economy.  However, I think it is prudent to be aware of where trouble might come from.  Just because it doesn't materialize this time doesn't mean we shouldn't be aware of its consequences.  To use a weather analogy, there will always be a small possibility that Hurricane Florence now headed for the Carolinas won't turn out to be the natural disaster many are forecasting.  If I lived down there I wouldn't want to bet my life on that small hope.  I'd rather be prepared and hope my preparations come to naught than bet on doing nothing and hope I'm right.  

I am still of the opinion that there is a higher probability of increased volatility as we move into the fall, especially with the elections right around the corner.  Also Florence is the sort of event coming out of the blue that could have economic and this market consequences if she's as bad as her billings.   My thinking on this is heightened owing to the move we've seen over the summer and the fact that stocks are now statistically overbought by our work.  That does not mean necessarily that the market will correct.  It may confound many and move higher or it may correct by time.

Speaking of those new highs in stocks, they are coming on the backs of fewer and fewer names.  David Rosenberg points out over on Twitter the worrying statistics of shrinking market breadth: "Signs of an unhealthy market:  FAANGM stocks up 30% YTD, the S&P 494 up 3%.  Over half the 2018 gains came from six stocks.  Historians know what that means."  Historically markets often don't fare well when all the market gains are confined to a very few names.  Markets will need to broaden out for investors who watch these sort of things to feel comfortable.

Changing the subject and in the "Things are Getting Better" department, according to the US Census Bureau "Middle-class income rose above  $61,000  for  the  first  time  last  year.  "  Also the US unemployment rate was 3.9%, an 18-year low.  Looks like that combination of tax cuts and strong economic growth are broadening out right now for the middle-class.  I know there's work to be done but these are good numbers in any way you want to look at them.

Back Monday.