Market Update

Stock Market

I find it hard to believe, but the S&P 500 continues to march higher. In my 3/31/17 commentary, I tried to show that US stocks are very expensive relative to history, and very little has changed in 3 months.

With hindsight, I can say that over the past few years, I should not have been so conservative: The famous physics axiom ‘an object in motion will stay in motion’ also applies to the markets. This axiom is the reason why we continue to own US stocks even though the risk/reward doesn’t look favorable. There will be a time in the future when US stocks stop going up, and that will be the time to take some profits.

While making money is certainly important, it could be said limiting losses is more important, and that’s why I don’t feel overly bad for being conservative. If an investor suffers a 20% loss, a 25% gain is needed to recover the money lost. Beyond a 20% loss, the return necessary to recover the money lost really starts to snowball:  30% Loss à 42.86% Gain. 40% loss à 66.67% gain. 50% loss à100% gain.

While now is a good time to be conservative, there will certainly be a time in the future to be more aggressive.

Economic News / Interest Rates

The Federal Reserve raised the federal funds rate (once again) at their June 14, 2017 meeting. As a reminder, the Federal Reserve controls short term interest rates, so in theory as they raise the federal funds rate, the interest you receive on cash should increase. Unfortunately, financial institutions only slowly pass on higher interest rates to investors & savers. To get around this, I have been using Treasury Bills to maximize the return on holding ‘cash’.

While shorter term interest rates have been going up, longer term interest rates have been going down. This is likely because the Federal Reserve historically has tried to slow down the economy with interest rate hikes. A slowing economy in turn creates less demand for loans, and the price of money (interest rates) drops to offset the decrease in demand…At least that is what an economic textbook would say. The other potential reason that longer term interest rates are so low is that interest rates in Europe & Japan make US interest rates look high.

I take managing investments very seriously, and I feel fortunate that going to work isn’t ‘work’ for me. I will always do my best to grow and protect my client’s investments while focusing on the long-term. I believe a longer-term view is becoming increasingly rare in investing, and having patience now so we can be impatient later will likely be rewarded.

 

Disclaimer: The commentary above is the opinion of Sound Investment Strategies. To the extent that information we provide is historical, it should not be considered predictive of future returns/circumstances. There is always a potential for profit or loss in the future. Nothing on this page is to be construed as an advertisement, inducement or representative of performance results.

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