Monthly Outlook: November 2017
These markets just keep grinding higher! The S&P500 has been up every month this year and, according to Deutsche Bank, this hasn’t happened for 90 years. But wait, it gets better. Every major asset class is in an uptrend: U.S. stocks, international stocks, bonds, and commodities. It’s just one of those times where it’s good to be an investor and we’re capturing the gains.
As Kai Rysdall of APM’s Marketplace would say, “Let’s do the numbers.” For October, bonds (Barclays Aggregate) were flat, at -0.02% total return. U.S. stocks (Russell 3000) gained +2.1%, with the Technology sector advancing a very strong +6.5%. International stocks (FTSE All-world ex-USA) were also up, adding +1.9% for the month. Japan was the star of the month for international stocks, gaining +5.2%. Putting it all together, our most popular iFolios 75/25 benchmark was up 1.4% for the month, the tenth straight monthly gain for the year.
UP-Trends are Intact
Last month, I discussed how we define a trend based on whether an asset is above or below its long-term moving average (we like the 200-day m.a.). This month, I’d like to consider how far the price is above the moving average. This measurement tells us how likely, or how imminently, a change in trend might occur. Let’s use the S&P500 as an example. Today, the S&P500 is 2,575 and its 200-day m.a. is 2,421. So the price is 6.4% above the trendline. If we look at history we can see that a 3% monthly move for the S&P500 would be a big move. That tells us that we are likely at least 2 months away from a possible sell signal. The S&P500 could go higher, or sideways, or it could go down. But if it does go down, it’s unlikely to break through its trendline this year. Other major markets have an equally large cushion above their 200-day m.a.: international stocks are 8% above and bonds are 2% above their respective trendlines. We watch every holding every day, but my point is that we can all rest just a bit knowing that the uptrends are strong, they are not teetering, and we are unlikely to sell soon.
Federal Reserve and Tax Policy
The news du jour is focused on two key events: Who will be the next appointed Chairman of the Federal Reserve and will Congress actually pass any meaningful tax reform before they recess in mid-November. These two issues are so important because easy money policy (Fed Reserve) and tax cuts (Congress) are candy to the stock market. It’s widely expected that current Federal Reserve Governor, Jerome Powell, will be appointed to replace Janet Yellen. He’s already a Governor, always votes with Janet Yellen, so that shouldn’t be a big change. If he is the appointment tomorrow, there will likely be very little market impact. As for tax reform, the market seems to be pricing in a meaningful proposal to lower tax rates. This is far from being a “done deal.” If Congress argues and does not get it passed, or settles on a more modest proposal than has been discussed, the markets could be a bit disappointed in the short run. We’ll watch these two events in November.
Compared to What?
The S&P500 is up 16% this YTD. Inherent in that kind of quote is that we’re quoting in U.S. dollars. It goes without saying. But what if the U.S. dollar is not the best base or denominator? Is there really price inflation or is it currency deflation? We all know it takes more and more dollars each year to buy the same things. The S&P500 is only up 4.9% this YTD, in terms of gold. And the S&P500 is only up 6.1% this YTD, in terms of Euros. If you were paid in gold or were a French investor, you wouldn’t be as impressed with the market this year. Of course, we’re U.S. investors using U.S. dollars so that’s our primary concern. But we’re also global consumers and so must consider these ideas in order to keep our global standard of living. It’s a concept that we’re thinking about here at Ryan Investments lately. We like to think outside the box and provide more than just returns. When we look at any asset (index fund), we not only ask, “Is it better than cash ($US dollars)?” we also ask “Is it better than other choices?” We’re confident in our iFolios strategy. We hope you are, too.