Those of you that have read past market updates know that I spend a good deal of time reading regular publications written by some of the most respected economists, renowned private money managers and global market analysts. I do this to objectively take stock (no pun intended) of where economies and markets are and to measure where they might be heading in the coming 6 – 12 months. So when I recently read that Jeremy Grantham “took considerable comfort” in Robert Shiller’s defense of his own position on issues relating to a pending market crash* I found it reassuring that even the best of the best can keep ego’s in check and remain objective as they offer market forecasts that includes self-analysis against their peers. Both agree stocks are expensive but both agree this bull has further to run. Incidentally so do J.P. Morgan and Citi Group to name a few others. Grantham went on to report that for the first time in a dozen years the global economy is in sync and profit margins are at a high.
In spite of the risk on attitude for stocks in 2018 I’d be remiss if I didn’t remind you corrections are part of all market cycles and typically are healthy, long-term. According to J.P. Morgan, dating back to 2009 the S&P has averaged intra-year sell-offs of just slightly more than 12%. Read that last sentence again and let it sink in. Remember the oil crisis in October of ’14 or when China rebased their currency in August of ’15 or Brexit in June ’16? Events like those can be confusing. Especially since most investors fear a repeat of 2008 – ‘09. No one, including Grantham can predict with 100% certainty when the next correction will occur or for that matter, when this Bull Run will end. But it’s foolish not to be prepared for some level of a meaningful sell-off in 2018. So if it does, try avoiding the knee jerk reaction to sell.
A couple of near-term events to keep an eye on would be the inability for Congress to pass a spending bill by January 18th. If that happens you can almost be assured volatility will spike. Another item on my radar is the one-time impact the repatriation tax could have on earnings. Last week global financial giant Goldman Sachs stated that reported earnings could take a fairly large hit as a result of this tax. So if you read or hear of a negative earnings report from any of your favorite companies, I’d encourage you to take a deeper look before assuming that ship has sailed.
Until next time…. stay nimble, be tactical and know what you own.
*Viewpoints – Bracing yourself for a possible near-term melt-up by Jeremy Grantham 1/3/20