If during a two week summer vacation, you heard that there was an escalation of tensions between the US and Korea; two international terrorist attacks; a US domestic terrorist attack; a looming debt ceiling crisis; and political upheaval in the White House, you might think that US stock markets would be in free-fall. You would be mistaken. Although markets were down over the most recent fortnight, the damage was fairly limited—about two percent overall. Even with the recent declines, the S&P 500 remains 8.3 percent higher on the year and just 2.2 percent below its record high, while the NASDAQ is up 15.5 percent in 2017. Given these numbers, its not surprising that the most frequently asked question that I have fielded over the past month has been, “I can’t believe that market is doping so well, considering (fill in the blank)…SHOULD I SELL MY STOCKS?”
The answer is easy: do not stray from your plan and bail out on stocks! Yes, a small number of stocks are pushing up the indexes. According to David Rosenberg, chief economist and strategist at Gluskin Sheff, the narrowness of the rally “is classic late-cycle activity,” which is why he believes “We are 90% of the way through this cycle, past the seventh-inning stretch.”
Presuming that we agree that the current bull market, the second longest on record (number one lasted 4,494-days and it ran from December 1987 to March 2000 – the current bull would need to make it past June 28th, 2021, without experiencing a 20 percent decline from a closing high to take the top spot), is getting a bit long in the tooth, what’s a long-term investor to do? Use this opportunity to rebalance your portfolio or free up cash for near term expenses or to replenish your emergency reserve fund, but please do not get into the habit of trying time the market.
That said, it is also important to guard against complacency, especially with the current economic expansion nearing 100 months old. It is already the third longest on record and if by some chance there is no recession between now and 2019, it would surpass the 1990s as the longest period of uninterrupted growth since at least 1854, according to Capital Economics.
That streak may be tough to achieve, considering that increasing real interest rates has been associated with most recessions over the past forty years. Analysts at Capital Economics explain: “as economic expansions mature, the Fed becomes determined to raise interest rates, either to squeeze out inflation, or because they are worried that a rise in inflation is just around the corner. In turn, higher real interest rates hit spending on rate-sensitive areas such as durable goods consumption and residential investment. As spending in those areas starts to decline, firms cut back on investment and inventories fall. Once that happens, production and employment drops, business and consumer confidence begins to collapse and a recession is all but inevitable.”
Considering that interest rates may be a key component of the next recession, this week’s speech by Fed Chair Janet Yellen at the annual Economic Symposium in Jackson Hole, WY is becoming the economic highlight of August. Fed watchers expect Yellen to provide more clarity on the timing of the central bank’s winding down of its balance sheet. While there have been expectations of the process starting in earnest at the Fed’s September meeting, a debt ceiling standoff could mean a delay until early November.
By that time, there may also be better news about wages. As many have noted, the missing component of the jobs recovery has been the slow growth of worker pay. But according to research from the Federal Reserve Bank of San Francisco, “wage growth for continuously full-time employed workers has been rising and is currently in line with rates seen at the previous economic peak in 2007.” The reason why the average annual wages has been held down is due to “the entry of new and returning workers to full-time employment, who generally earn less than workers who are leaving full-time employment…This effect is even more pronounced than usual because of the large-scale exit of higher-paid baby boomers from the labor force.”
So while median wage growth is actually about 4 percent, in line with past recoveries, average growth remains a little under 2 percent, a trend that is should improve as the labor market tightens.