final 2017 0315 jaypenney marketcomment[3]...like, “elevated”, “expensive”, and even...

HAPPY 8TH BIRTHDAY, BULL MARKET! WHAT’S NEXT?

Four reasons to “Love” the market at these levels, and four reasons to “Leave” it! Jay R. Penney CFP ®, CFA ®, AIF ® Chief Investment Strategist for Ashton Thomas Private Wealth Earlier thismonth (March9th), theStandard&Poor’s500 Index,a “proxy” forU.S. stockmarkets, celebrated theeighthanniversary of the end of itsmost recent “bearmarket” decline (Source:www.marketwatch.com/story/the-unrelenting-stock-market-bull-run-demands-some-respect-at-its-8th-anniversary-2017-03-09). Its chilling effects still fresh in manyinvestors’memory,thebearmarketthatendedeightyearsagowilllongberememberedasanastysideeffectof“TheGreatHousing/CreditCrisis”.Thestockmarket’sviolentdeclinetookjustseventeenmonthsfromstarttofinish,butittook(-57%)ofthemarket’scapitalaswell(Source:www.marketwatch.com).SinceitsmercifulendonMarch9th,2009,whentheIndexclosedatameager676.53,investorshaveenjoyedanuninterrupted“bullmarket”,andatthecloseofthemarketlastevening,theS&P500Indexsits+249%higherthanitsstart.Asthechartbelowreveals,at96monthsinduration,themarket’scurrentadvanceisnowthesecondlongestsincetheendofWorldWarII,behindonlythenine-plusyearrunithadduringthelastdecadeofthetwentiethcentury.Itisalsothethirdbestbullmarketintermsofpricegainssincethattime.

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HAPPY 8TH BIRTHDAY, BULL MARKET! WHATS NEXT?

Four Reasons to “Love” the Market at These Levels, and Four Reasons to “Leave” it!

Thatisaheadyadvance,andonethatleavesmanywonderinghowlong(andhowfarup)itmaygo,beforetheinevitable“bear”comeshuntingforoverconfidentand/orcomplacentinvestors’capital.Asmarketprofessionals,weareaskingourselvesthesamequestionsIheareverydayonCNBCandothermarketoutlets,as“experts”disagreeonmanythings,includingthehealthandlongevityofthisbullmarket.Willitlivetoseeaninthbirthday,orwillitendasbadlyasmanyothershave?Asimpressiveasthegainsshownaboveare,thedeclinesthatfollowedmanyofthemwereequallyasimpressive:

BearMarketDeclines(S&P500Index)1929-PresentBEARMARKET CAUSE DURATION(MONTHS) PERCENTAGEDECLINE

Sept.1929–June1932 Depression 34months (-86%)May1946–June1949 Post-WWIISlide 37months (-30%)Dec.1961–June1962 ColdWarJitters 6months (-28%)Nov.1968–May1970 Recession/Inflation 18months (-36%)Jan.1973–Oct.1974 OilEmbargo/Inflation 21months (-48%)Nov.1980–Aug.1982 Stagflation 21months (-28%)Aug.1987–Dec.1987 “BlackMonday” 3months (-34%)Mar.2000–Oct.2002 “Dot.comBubble” 30months (-49%)Oct.2007–Mar.2009 Housing/CreditCrisis 17months (-57%)Source:http://www.nbcnews.com/id/37740147/ns/business-stocks_and_economy/t/historic-bear-markets/#.WMRQpFXythEThedataabovetellsusthe“average”Americanbearmarketlasts21months,andtakes(-44%)ofthemarket’scapitalizationwithit.Whilethecausesofbearmarketcollapsesaretypicallyeconomicinnature(i.e.stagflation,recessionordepression,oreconomicmarketdisruption),bullmarketprognosticatorsarepointingtowardimprovingeconomicdatahereintheU.S.Thatsaid,bearmarketsaresometimestriggeredbyconcernsaboutexcessivevaluations(“irrationalexuberance”),and/orgeopoliticalrisks,bothofwhicharepresenttoday.So,areweapproachinganotherbearmarket?Likemostmarkets atpointsof inflection, today’s stockmarkets arebuffetedby conflictingdata, somegood, somebad,making it difficult topredict near-termmovementswith confidence. Rarelydobearmarketsbeginwithuniversally badeconomicandmarketdata,andrarelydomarketparticipantsrecognizetheseinflectionpointsasbearmarketsinthemaking.Todayisnodifferent.Thatsaid,therearereasonsforoptimism:

1) U.S.GrossDomesticProduct(“GDP”)remainspositive,andrecessionisnowhereinsight.

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GDPreportsinrecentquartershavedeliveredmodest,butstillpositivegrowth,andestimatesforgrowthinGDPfor2017rangebetween2%and3%.Whileeconomicgrowthof2%isstillmodestwhencomparedtothe3.60%averageannualgrowthinGDPseenduringthelastdecadeofthe20thCentury(1991–2000),itisfarfromrecessionary.(Source:BureauofEconomicAnalysis)

2) ConsumerConfidenceRemainsHigh

ConsumerconfidencehasbeenrisingrelativelysteadilysinceitsAugust2011readingof55.8,anddeliveredahigherthanaveragereadingof96.3inFebruary.Rarelydomarketscollapsewhenconsumersareconfident,andspending.

3) TheFederalReserveisStronglyHintingatUpcomingRateHikes

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TheFedwantsto“normalize”interestratesafterkeepingthemartificiallylowsinceloweringtheFedFundsRateto“0%-0.25%”inDecember2008.AftersevenyearstetheredtotheFed’severyutterance,themarketseestheFed’spromisetoraisetheFedFundsRatethreetofourtimesin2017,includingthe25bpshikethisweek,asconfidencethattheeconomicexpansionisfinallystrongenoughtowithstandtheheadwindsofhigherrates.IfChairYellenandhercolleagues,whohaveresistedthismoveforyears,fearingarecession,areconfidentthathigherrateswillnot“tank”theeconomy,investorsshouldtakeheart.

4) The“TrumpBump”In the 127 days since President Trump surprised theworldwith his improbable electoral victory (November 8th, 2016 –present)theS&P500Indexhasadvanced244points,or+11.40%.

Source:YahooFinance:S&P500Index:November8th2016–March15th2017AsaTrumpvictorybecameclearontheeveningoftheelection,DowJonesIndustrialAverage’sfuturesinitiallyplunged750pointsastheresultswereannounced,beforefullyreversingthefollowingday,andrallyingtogain+256pointsoverElectionDay’sclose.(Source:www.marketwatch.com/story/dow-futures-plunge-750-points-on-election-turmoil-2016-11-08)Itsadded2,513pointssince.MarketsareadvancinginanticipationoftheTrumpAdministration’sdeliveryoncampaignpromises(aidedbyaRepublican-controlledCongress)todeliverincreasesininfrastructureanddefensespending,reformsof(andreductionsto)thecorporateandpersonalincometaxcodes(andmarginalrates),andtherepealandreplacementoftheAffordableCareAct.IfthePresidentandCongresscandeliver,stockscouldadvanceevenfurther.

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Therearegoodreasonsforcaution,however,mostofwhichcenteraroundvaluationmetrics:

1) TheS&P500Index“AsReported”Trailing4QuartersP/ERatiois“North”of25

SinceSeptember30th,2011,whenthe4Quarter(trailing)P/ERatiowasatacyclicallylow13.01timesactual(“AsReported”)earnings, thechartabovedocuments the fact that the Index’current levelhasexpanded (exploded?) to25.10 times theearningsIndexconstituentsactuallydeliveredin2016.Prognosticatorsdescribetoday’sstockvaluationlevelsusingtermslike,“elevated”,“expensive”,andeven“approachingbubbleterritory”,butnobodyiscallingstocks“cheap”attheselevels.The last time the S&P500 Index’ P/ERatio exceeded25was September2008, just before a (-57%)decline in the Indexoccurred.

2) RobertShiller’sCAPE(Cyclically-AdjustedPrice/Earnings)RatioisalsoinDangerousTerritory

Shiller’sCAPERatio–(1880-present)

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Source:www.multpl.com/shiller-pe/ProfessorRobertShillerofYaleUniversityinventedtheShillerCAPERatiotomeasurethemarket’svaluation.Someconsideritamorereasonablemarketvaluationindicatorinthatit“smooths”theearningsdenominatorbyaveraging10-yearearningsnumbers,eliminatingthefluctuationsseeninprofitmarginsduringbusinesscycles.TheCAPEIndexiscurrently29.39times“smoothed” earnings. This is 77.8% higher than the historical average of 16.73 times earnings. (Source:www.multpl.com/shiller-pe/)ThechartaboveshowsthetwoprevioustimesinhistorythatShiller’sRatioexceededcurrentlevels(September,[email protected],[email protected]),andhistorywarnsthemarketssubsequentlyfell(-86%),and(-49%),respectively.Ohoh….

3) CorporateEarnings“Peaked”inJuneof2014,andhaveFallenSince

Theredlineinthechartaboverepresentsthe4-Quarter(trailing)“AsReported”Earnings(PerIndexShare)oftheS&P500Indexsinceearly2010.ThebluelinetrackstheIndex’Priceovertheperiod.Historically,thetwolines(EarningsandPrices)typicallymove in thesamedirection. Itmakessense thatascorporateearningsgrowover time, thesharepricesof theunderlyingcompanieswouldnaturallybeexpectedtogrowaswell.Moreover,youdoseearelativelysymbioticrelationshipbetweenthetwo(EarningsandPrices)fromearly2010,throughSeptember2014,butEarnings(redline)clearlyhavestalledsince,declining(-18.42%)overthefollowingsixcalendarquarters(toMarch2016),whiletheIndexPricerose+4.43%overthesameperiod.Earningshavestartedtoimprovethepastyear,rising+9.35%sincethen,buttheIndexPricecontinuestorisefaster,adding+15.23%sinceMarchoflastyear,expandingtheP/ERatio,andexacerbatingthe“valuationissue”.(Source:www.us.spindeces.com/indices/equity/sp-500)

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4) GeopoliticalRisksareMultiplyingandIntensifyingThenewAmericanPresident isbeingseverely tested in theearlydaysofhisAdministration. Inrecentweeks, theNorthKoreanshavetestedmanyintercontinentalballisticmissilesinanefforttodeveloponethatcouldreachGuamorHawaii,andultimately,theWestCoastoftheU.S.,presumablycarryingoneoftheirnuclearbombs.SeventypercentofNorthKorea’s1,200,000“active”militaryisstationedalongtheKoreanPeninsula’sDMZ,just35milesnorthofSeoul,SouthKorea,andarebackedupbyanother7,700,000“reservists”. (Source:www.cnn.com/2015/10/09/asia/north-korea-military-might/) The“DearLeader”,KimJongUn,appearstobeunhinged,killingrivalsinternally,includingseveralofhisownfamilymembers,and is threatening war on the U.S., and on our regional allies, as well. How “suicidal” the country’s leadermay be isunknowable,butthoughhiscountry’sdestructionwouldbeacertaintyshouldheactuallydecidetousenuclearweapons,thereisnodoubtthathecouldveryquicklyinflictsignificantdamagetobothSouthKorea,aswellastoJapan.Recently,PresidentTrumptoldareporterofanInaugurationDaydiscussionwiththen-PresidentObamaontheirwaytotheCapitalforMr.Trump’sswearingin.Mr.TrumpsaidhewaswarnedbyPresidentObamathattherewasoneparticular“situation”intheworldthatpresentedthegreatestthreattothehomeland,andgiventheescalationofhostilities intheregion intheweekssince,I’mguessingthiswasthesituationtowhichhewasreferring.Additionally, the Administration has troops stationed in over 150 countries today (Source:https://en.wikipedia.org/wiki/United_States_military_deployments),includingmanyservinginharm’swayin“hotspots”inSyria,Iraq,Afghanistan,Somalia,andyes,SouthKorea.OurlongstandingsupportforIsraelbringswithitenemiesthroughouttheMiddleEastandNorthAfrica.InthestreetsofTehran,Iran’s“SupremeLeader”leadsthechantsof“DeathtoAmerica”.Earlythismonth,IranianNavalvesselsharassedU.S.NavySurveillanceshipspassingthroughtheStraitofHormuzwithfastattackboats,clearlyprovokingtheU.S.,andtestingitswillingnesstorespond.ThecurrentRussianPresidenthasforciblyannexedneighboringUkraine’sCrimeanpeninsula,openlythreatensourNATOallies,andhasdisplacedmillionsofSyrianciviliansbydestroyingentire cities, not tomentionhismeddling inourelections. TheChinesegovernment isbecomingincreasinglyangeredbyTaiwan’srelationshipwiththeWest,anditsimplied“protection”bytheU.S.,andisliterallybuildingislandsinthemiddleoftheSouthChinaSea,andclaimingterritorialsovereigntyoverpreviouslyfreelysailedinternationalwaters.Any single one of these geopolitical risks could escalate into an extremely dangerous situation thatwould panic capitalmarketsworldwide.Itmaybefairtosaythatcollectively,theseglobaltensionshavethepotentialtopresentthegreatestcombinedthreatstheU.S.hasdealtwith,perhaps,sincefacingtheAxispowersinWorldWarII,andcertainly,sincethepeakoftheColdWarinthe‘70’sand‘80’s.Givenboththe“positive”economicandsentimentdata,aswellasthevaluationandgeopolitical“concerns”weobserve,whatisaninvestortodo?Staythecourse?Runforthehills?I’llbeginmyanswerwithanacknowledgementthatthefutureisunknowable,andwhilepastmaybeprologue,the“inputs”needed for accurate projections (economic conditions, earnings data, geopolitical risks, etc.) change frequently andindependentlyofoneanother,assuringobserversthatnotwomarketcyclesareexactlyalike. Wecanpointtodatathatwouldimplyfurtheradvances,andtoothersthatwarnofpendingcrashes,butconditionshaveneverbeenexactlyastheyexisttoday,sonoonecanbehighlyconfidentintheirnear-termprojections.

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Ourfirmmaintainsa“tacticallydefensive”Core/Satelliteportfoliodesignthatemploysmanagersandportfoliostrategistswho employ disciplined and unemotional decision-making tools. All of these tactical and hedged strategists seek to“participatein”ahigherpercentageofupsidemarketmovementsthanthey“participatein”cyclicalmarketdeclines.Ihaveheardtheapproachdescribedbyanumberofthemas“winningbynotlosing”. Thetheoryisthat ifmanagerscanavoidtaking“largelosses”,theywon’thavetospendyearsdiggingoutofmassiveholestorebuildcapital.Hereisa“realworld”exampleofhowminimizinglosses,evenifitmeanslimitinggains,canleaveaninvestorbetteroff.Imaginetwohypotheticalinvestors,oneinvesting$1,000,000intheS&P500Indexfrom2000–present,andanothergettingjust50%ofthegains,aswellasreceivingjust50%ofthelosses.Herearetheinvestors’accountbalancesatkeycyclicalinflectionpoints:IndexValue/TimePeriod 100%Investor 50%InvestorBearMarket(January2000–October2002)(IndexDeclinesby-49%) $510,000 $760,000BullMarket(October2002–October2007)(IndexAdvancesby+101%) $1,025,100 $1,143,800BearMarket(October2007–March2009)(IndexDeclinesby-57%) $440,793 $817,817BullMarket(March2009–Present)(IndexAdvancesby+249%) $1,538,368 $1,835,999Inadditiontoendingupwithalargeraccountbalance,Icanassureyouthatourhypothetical“50%Investor”wouldhaveenjoyedtheridealotmorethanourhypothetical“100%Investor”wouldhave.Volatilityisunwelcomebyrationalinvestors,andespeciallyunwelcomeifyouhavemultiplemarketcyclestonavigateyourinvestmentcapitalthroughduringyourremaininglives,aswasthecaseduringthisseventeen-yearexample.Becauseweunderstandthatwecan“winbynotlosing”,andweknowthatavoidinglargelossesworkstoourclients’benefit,whileallowingthemtosleepatnight,wearerelativelyunconcernedaboutthenear-termdirectionofthisrather“extended”bullmarket.Ifthemarketsdeclineforanyreason,webelieveourportfoliomanagersanddesignwillprotectourclients’assets.Ifthemarketscontinuetorisedespiteitselevatedlevelsandduration,foranyreason,ourmanagerswill“participate”insomeofthegains.Overtime,itseemsthatthebestoffenseisastrongdefense.Asalways,wethankyoufortakingthetimetoreadourcommentsregardingcurrentmarketconditions,andwewelcomeyourcommentsorquestions.

Jay R. Penney CFP ®, CFA ®, AIF ® ChiefInvestmentStrategistAshtonThomasPrivateWealthLLC.

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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Ashton Thomas Private Wealth, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Ashton Thomas Private Wealth, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Ashton Thomas Private Wealth, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Ashton Thomas Private Wealth, LLC client, please remember to contact Ashton Thomas Private Wealth, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or Investment Advisory services provided by Ashton Thomas Private Wealth, LLC, (ATPW) an SEC registered investment adviser. Securities brokerage services provided by Peachtree Capital Corporation, a Registered Broker/Dealer, Member FINRA and SIPC. Though there are similarities among these services, the investment advisory programs and brokerage services offered by Ashton Thomas' advisors are separate and distinct, differ in material ways and are governed by different laws and separate contracts with you. A copy of Ashton Thomas Private Wealth LLC's current written disclosure statement discussing advisory services and fees is available for review upon request. The information contained in this e-mail message is intended only for the personal and confidential use of the recipient(s) named above. If the reader of this message is not the intended recipient or an agent responsible for delivering it to the intended recipient, please notify us immediately by e-mail, and delete the original message without any review/dissemination thereof. Please remember to contact Ashton Thomas Private Wealth, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Ashton Thomas Private Wealth, LLC effect any specific transactions for your account. Please be advised that there can be no assurance that any email request will be reviewed and/or acted upon on the day it is received-please be guided accordingly. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon

final 2017 0315 jaypenney marketcomment[3]...like, “elevated”, “expensive”, and even...

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