As Good as It Gets?
If you had to describe the perfect market environment, what would it look like?
The following attributes might come to mind:
1) High returns with low volatility and 2) low drawdowns, with 3) global participation, 4) both stocks and bonds rising, 5) the economy expanding, 6) earnings growing, and 7) an easy Central Bank.
Sound too good to be true? Let’s take at where we are today…
1) High returns with low volatility:
The S&P 500 is up 9.7% thus far in 2017 and has achieved this return with only 7.0% annualized volatility (note: all data herein is through June 2).
2) Low drawdowns:
At 2.8%, the maximum drawdown in the S&P 500 year-to-date is lower than every other year with the exception of 1995 (note: on a closing basis).
The median intra-year drawdown since 1928 is 13.1%. Since 1928, there have been only five years that did not have a 5% drawdown the entire year: 1954, 1958, 1961, 1964, and 1995.
3) Global participation:
With the exception of Russia (ERUS) and Saudi Arabia (KSA), every country ETF is positive in 2017 with a median return of 16.4%. 15 countries are up more than 20% year-to-date.
All-time highs have been a global affair, with new highs registered last week in the U.S. (SPY), Japan (EWJ), Belgium (EWK), Ireland (EIRL), Germany (EWG), Switzerland (EWL), Sweden (EWD), France (EWQ), Hong Kong (EWH), Netherlands (EWN), and South Korea (EWY).
4) Both stocks and bonds rising:
With 10-year yields falling, bonds (AGG) are up a respectable 2.7% year-to-date.
5) Economy expanding:
The Atlanta Fed is projecting 3.4% real GDP growth in the second quarter.
At the end of June, the expansion will hit 96 months in duration, the 3rd longest on record.
6) Earnings Growing:
With 97% of companies reported, second-quarter earnings are up 27%/21% (As-Reported/Operating) over the prior year.
Sales growth of 6.9% will be the best since the 4th quarter of 2011.
7) Easy Central Banks
While expected to hike twice more in 2017, the Federal Reserve is still maintaining an easy monetary policy. Every developed country central bank has negative real interest rates.
Is this as good as it gets?
I don’t know, but for investors, it’s pretty darn close. The challenge, as we know from history, is that just because something is really good doesn’t mean the next stage has to be really bad. If it were, the game would be easy. You would just sell everything today and wait until everything is really bad next month to buy everything back at a lower price.
But that’s not how the market works. Most of the time, really good environments continue to be good for some time and even when they’re less good, they’re still ok. And importantly, investors can still make money in the transition from really good to ok.
While the best investing opportunities invariably present themselves during bad times, there are (thankfully) many more good times than bad times. Which is why it can be nearly as challenging for investors to stay invested during good times as it is during bad times. We have a hard time accepting that good can continue to be good just as we have a hard time accepting that bad will not be bad forever.
Eight years have now passed since the expansion began in June 2009. Each June since has been increasingly challenging for investors to hold on. The litany of reasons to sell grows with each passing year as does the fear of giving back your hard-earned gains.
As good as it gets? Maybe. But that doesn’t mean it’s easy.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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