….best describes this bull market to me, and as the song says, ‘not too soft, not too loud, just enough to draw a crowd’. As you know, the current economic climate is very good, interest rates are only slightly higher, margin debt has been running high vs. GDP for several years now but the chart below tells another side of that story. Cash on the sidelines is a bit lower as a percentage of equity values. Mutual funds have been holding very low levels of cash and that would seem bearish. It was also low in 2010, near the market bottom. Apparently, they are being rewarded for staying invested so far. I would expect they will begin to build their cash positions at some point, probably when the market ever corrects. How bearish would this be for the market? A little. Portfolio managers for many of the mutual funds are inexperienced in bear markets which might be a reason the cash levels are low, but the expectation the economy will continue to do well seems to us to be correct. Time will tell. New York real estate prices have been finally correcting with the average home prices down 5% and overall sales in Manhattan down 17% from last year. This summer however has been a fantastic year for Champagne, having one of the best summers ever in terms of quality and yield. It will take at least 3 years before we get to begin tasting these, and I sure hope we have an excuse to celebrate something when they arrive!
Investors that have not been invested in the top high market capitalization stocks have really had a tough time keeping pace. Believe me, we know! However, something started to happen a year ago as the ‘noise’ has picked up. I listen to many earnings calls or read the transcripts. If you don’t do that, let me tell you something I have noticed. It really seems that capital investments and restructurings many corporations have made since the financial crisis to better align their business with profitable growth are handsomely paying off. I look over our portfolio and see growth across the board with few exceptions. I don’t recall seeing a time like this where so many are doing so well. This shows up in the earnings reports which are growing and exceeding expectations. Of course, some sectors continue under pressure and value investors have grown weary of them. Retail, metals and mining, and energy just to name a few. We keep poking around in these three areas.
I suggest that any correction that happens will come swiftly, be sharp and be short lived. My thinking here is that the pattern of this bull market has been that way and I see no reason for that to change. I could be wrong about that, and I will not try to predict if and when this might happen. From where will a correction start is the question. Read on! The number of companies publicly traded has been declining, which is interesting as the overall market valuation of the market is at new highs, roughly $30 trillion. This seems high, especially when you know that amount does not include the private company shares that can be traded by institutions (Companies like Uber) so it seems logical that wealth held in private companies versus public companies is growing. New places to invest are also cropping up, especially the cryptocurrencies, and are attracting enormous amounts of capital. Venture capital is readily available, at the moment, to the emerging company that shows promise. So much has to keep working out for this to continue, so maybe we will start to see some pressure on these sectors, and those investors retreat a little even though the stock market might not suffer a massive decline. Let me make this point on crypto. So many investors around the world want to move money out of their currency and do so without being noticed, and some simply want to simply show off to their friends their holdings of these assets. We notice this in our country and I suspect the demand for these currencies in some form will remain for many years to come. Venezuela is in a crisis and I am sure you are aware about what is happening. Cash in Venezuela has value for a few days and then is soon worthless. I feel for the citizens there. Socialistic ideals, corruption and dependence on selling their only real export, oil, has been a bad combination. I can see why people with money there would want to convert it to a crypto currency. If it holds any value, that is better than what they have. They have the largest reserves of oil on earth. If that ever helps them is yet to be seen. (Note: Catholic Relief Services is one of the great organizations helping down there).
GDP, gross domestic product, is climbing. The pace of this climb might end up being historic, but regardless, the markets have responded. While these do not go totally in sync, they certainly over time track each other. I have spoken in the past about the index funds, and finally some commentary is arising that I find of interest. There are two types of index funds. One is market weighted which gives you more exposure to the larger companies, and the other is equal weighted which gives you the same exposure to each company. (500 stocks each have .2% of the fund). I doubt many investors know the difference. But any selling of the market weighted S&P would weaken the largest companies first, and that might kick start a correction where the larger companies correct faster than the smaller ones if the buyers for smaller companies continue to show interest. Nevertheless, while these investors benefited from more exposure to the large companies, I suggest the equal weight funds may work out better going forward.
Are people simply born to be pessimistic or optimistic/liberal or conservative/passive or aggressive? Sure seems that way. Right now the bearish investors must feel awful. I recall a similar pain from corrections in the past where we saw or portfolios erode in value. I bring this up because it really is good to be a bit of both. A friend of mine, a Green Beret, once said “you need war time Generals and peace time Generals and someone smart enough to know which to use when!” I give an analogy to sailing, that taking some sails down when the weather is good seems to work out better for a storm that shows up out of nowhere.
I can’t ignore the rising value of markets and not be more cautious. The investors that are short the market must be nearing their wits end, meaning that there might be a spike up at some point as they give up and compete with the bulls to buy shares. So, while you want to stay in the market, selling some shares if a frothy and ‘noisy’ market evolves will likely over time make sense. The market multiple in past tops of bull markets signals we are near the high end of market prices. If you are prone to be a panic seller, now is the time to sell, not later. But do understand, a 10% rally from here is almost 2600 points on the DJIA. That sounds exciting, so I will leave it at that.
