THIRD QUARTER 2017 – What Inning is It?

Fall is one of my favorite times of the year. The temperatures are mild, the leaves are changing colors and America’s favorite sports are in full swing. This is the only time of year you will see baseball, football, and basketball all playing at the same time. Tis the season of a sports fanatic.

Yogi Berra was quoted as saying “It ain’t over ‘til it’s over”. He was talking about baseball, but that quote has translated into a powerful statement pertaining to many aspects of life. Looking at the stock market, many are wondering when will the current bull market be over. Although it is impossible to guess when this 8 + year bull run will ultimately end, can we at least know what inning we are in?

Although we pride ourselves on our advisory skills, we don’t claim to have any prognostication abilities. With that said, we believe we are somewhere in the 7th or 8th inning of this bull run. This doesn’t mean too much, because in the stock market, innings can last for years and declaring something “over” can simply mean the start of a brand new game.

Here is what we do know. This past quarter, the S&P 500 was up 4.5%, putting us on pace for the ninth consecutive calendar year of positive growth when reinvesting dividends1, a feat not achieved since 1999. We also know that unemployment is staying low (currently at 4.2%) and inflation is creeping up (currently at 1.9%)2. This will most likely lead the Fed to increase interest rates again in December.

The Fed3 has also laid out its plan on unwinding the QE-laden balance sheet that totals $4.5 trillion of Treasury bonds and mortgage-backed securities (MBS). When you have a portfolio this large, you can’t sell ANY substantial part of it without flooding the market and driving up interest rates. According to the September 20th Fed announcement, they plan on slowly letting billions of dollars simply mature into the ether each month. The gradual dissolving of billions of dollars will eventually run down the balance sheet without too much market turmoil for bond prices. It will be a delicate operation and will probably have many revisions along the way. At least there is a plan, which by itself, helps keep investors calm.

Lastly, in our July monthly summary we mentioned that stocks are approaching an overvalued level compared to bonds. 

We aren’t at that point yet, but as interest rates increase, the target gets closer. However, it is important to realize that markets are driven by greed and fear, so stocks can be overvalued (by our measures) for several months or years before 

retreating.

When should we expect the next stock market correction? With all these moving parts, I lean toward Yogi’s perspective, “When it’s over”. Until then, enjoy all that fall has to offer.

 

 

1 Thomson Financial

2 www.bls.gov

https://www.wsj.com/articles/how-the-feds-balance-sheet-unwind-will-ripple-through-banks-1505934565

 

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