Market Alert July 4, 2017: A Great First Half, but Where Do We Go from Here?
- Stocks have the best first half of the year since 2009.
- Bonds were up in the first half of this year despite the Federal Reserve raising interest rates.
- We expect the next three months to be flat or down for the stock market.
- We see a strong finish for the market in the last quarter on renewed optimism for the Trump agenda.
- Despite this view, we have reduced our fearless forecast of Dow 23,000 down to 22,250.
- A strong word of caution despite our positive outlook for the second half of the year.
Stocks have the best first half of the year since 2009.
The stock market was off to the best start this year since 2009 according to CNBC. The economy remained steady as did confidence that the Trump agenda would stay on course.
The question we have to ask ourselves, of course, is “why?”
Coming out of the great recession one can see why the market would have risen as rapidly as it did. However, we have no such springboard today. Instead, we have a very slowly growing economy, massive national debt, and no real signs that the Trump stimulus package will even get through Congress.
We believe that the risk that we have today is different than anything we have had in history. The hundreds of trillions of dollars of global debt put a significant strain on government’s ability to do anything about the next recession. In fact, we see all of this debt exacerbating the effects of any economic slowdown. The worst recessions that we have had around the world, in our opinion, have all been the results of governments taking on too much debt.
With the market near all-time highs, this is no time to be complacent and assume that the market only goes up! The best time to plan ahead for the next market crisis is now!
As you can see in the chart below, the market can turn around very quickly and very unexpectedly. The 2008 bear market wiped out 12 years of gains in just 17 months. (Source: Standard & Poor’s). Many of you participated in that bear and the one in Y2K.
Source: Standard & Poor’s
Clients who followed our lead were out of the Stock market during the great market crash of 2008.
We do not want to see crippling losses happen to anybody. It is why I write this email; it is why our advisory firm exists, it is why I do my radio show and why we have our seminars. I want to help as many people as possible not to become poor and to have peace of mind.
Bonds were up in the first half of this year despite the Federal Reserve raising interest rates.
Under normal circumstances, when the Federal Reserve is raising interest rates we should see bonds lose value. However, this year that has not been the case. Instead, we have seen bond prices go up which essentially means that long-term interest rates have been going down as the Fed has been raising short-term interest rates.
This dynamic is having the effect of flattening the yield curve. That is: making the long-term rates approximate those of short-term rates. According to Bloomberg, over the last 40 years, every time the yield curve has gone negative, meaning that long-term rates were lower than short-term rates, we have had a recession and a bear market. As we sit right now, the yield curve is almost flat, but if the current trend continues, it will go negative.
We expect the next three months to be flat or down for the stock market.
With tensions rising in North Korea, the prospects of additional rate hikes for the Federal Reserve, a barely growing economy, the Trump agenda seeming to be stalling out, and the general unease that the market is too high will all conspire to keep the market flat or down for the next quarter, in our opinion.
The stock market may be subject to only downward pressure for the next three months as there appears to be no encouraging economic data on the horizon to help it go higher.
We see a strong finish for the market in the last quarter on renewed optimism for the Trump agenda.
We continue to be optimistic about the possibility that tax reform, repatriation, and infrastructure spending plans will be presented to Congress before the end of this next quarter. Should this be the case, there will be renewed vigor in the market regarding these programs, and we see the fourth quarter as finishing strongly.
Despite this view, we have reduced our fearless forecast of Dow 23,000 down to 22,250.
While 22,250 does not seem very far from where the market closed on Friday, it would still represent a nice gain to finish the year off with.
I would like to invite you to come to one of our seminars. They are designed for those of you who are retired or retiring soon, and they are free.
At the free retirement seminar we will answer these burning questions:
- How do I protect my retirement from the next market crash?
- How do I avoid the three basic “pitfalls” of retirement distribution planning?
- Am I on track to be able to retire?
- When should I take Social Security? 62? 66? 70?
- Am I diversified properly?
- How much can I afford to spend during my retirement?
- What is the best investment I can use to fight inflation with?
- How do I determine how much risk is appropriate for me?
- Do I take my pension or a lump?
- How do I avoid having 85% of my social security being taxed?
- Should I rollover my 401(k)?
- How do I reduce my income taxes in the future?
A strong word of caution despite our positive outlook for the second half of the year.
We mentioned earlier in this email that the yield curve is flattening and that is not a good sign for the future state of the economy and therefore the state of the stock market.
There is another disturbing fact, and that is that the stock market has only seen valuations at the levels we have now in 1929 and in Y2K according to Robert Schiller, the Nobel prize-winning economist. We know all that in 1929 and in Y2K we had two of the worst bear markets in history. You may recall that Robert Schiller was the author of “Irrational Exuberance” where he warned investors that they were irrational and too exuberant in March 2000 right before the stock market crashed. We would do well to heed his warnings.
Look at the chart below: what do you think is going to happen next?
- Do you know if you have enough money to retire on?
- What are the 5 strategies that you can use to reduce your income taxes?
- How do you plan for your retirement cash flow?
- What should you do to maximize your Social Security benefits?
- Are you properly diversified?
We would love to review your entire financial plan, analyze what you have and see if we can help you. If we can, that's terrific, if not that's fine too. Either way, there is no charge or obligation, and we will part friends!
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There is nothing more important to us than that. It is our singular goal to keep our clients from becoming poor. Preserving the wealth that they have built is job number one for us. I encourage you to join the Money Matters family!
I believe that avoiding large losses is the single most important thing that we should be concerned about as investors.
Perhaps you were given a package by your employer. Perhaps you sold an asset and want to know how to properly invest the proceeds. Perhaps you inherited money and want to keep it safe and grow it if you can. Perhaps you just want a second opinion. These are all reasons for you to take advantage of all of the resources that we at Money Matters have to offer you.
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Thank you for subscribing to this newsletter. I hope it finds you and yours in good health and spirits.
Ken Moraif, CFP®, MBA
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