September 2018 Market Update – A Few Thoughts

Brian Johnson

Brian Johnson
CIO and Shareholder

Written by Brian Johnson, Chief Investment Officer

Summary: U.S. stocks (equities) remain in a secular (10-20 year) bull trend. International markets have not done as well recently, but they remain attractive for long-term investors.

In lieu of an analysis of one aspect of the market, this month I’m sharing thoughts and interesting pictures on three topics about which clients have inquired recently. As always, your feedback, positive or negative, is welcome.

I. Interest Rates and Stock Market Performance:

Data show that historically, when Treasury yields are below 5% (the 10-year Treasury is currently at 2.998%), rising rates have been associated with rising stock prices. On the graph below, dots above the horizontal (0.0) line and to the left of the vertical dotted (5%) line represent periods when rising rates coincided with better stock than bond returns. As you can see, as you move from left to right, it isn’t until the 10-year yield approaches that 5% level that stocks have stopped outperforming bonds. This is consistent with current leading economic indicators showing no signs of a recession in our immediate future, the secular bull trend in stocks that we’re in is likely to continue (albeit with significant hiccups and some cyclical declines along the way).

II. Poor Relative Performance of International Markets:

Foreign stocks have not done well recently. Emerging Market equities are in cyclical bear territory, down about 20% from their January highs. Developed Markets haven’t done quite as poorly, down more than 10% from their January highs, but still badly lag U.S. equities.

The first chart below shows that U.S. equity outperformance (i.e., better returns than non-U.S. stocks) tends to be cyclical. The second chart shows that, almost any way you look at it, U.S. stock prices are expensive (or “rich”). While the majority of our equity money is in U.S. stocks, “reversion to the mean” suggests that this is also a better than usual time to be investing in international markets.

III. Thoughts on crypto-currencies:

The technology involved in bitcoin and other crypto-currencies is powerful, but as an asset class, this is still too immature and speculative to merit a place in the diversified investment portfolios of most of our clients. The following three headlines, followed by a simple drawing (a reminder of what should drive your investing), summarize the crypto-currency situation pretty well.

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