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A Peek Into 2017 – CAMS Weekly View from the Corner

Week Ending December 18, 2016

We are now coming down the final stretch for year 2016 with significant strength in the stock market remaining in place.  In addition, the inter-market explosions that have occurred post election – multi-year high Dollar, much higher market based interest rates, Industrial oriented metals and stocks much stronger – to name a few, also remain.

Within the S&P 500 the catapult of offensive/risk oriented sector leadership post election also remains solid.  Our SPX9 system continues to identify Consumer Discretionary, Industrials, Basic Materials, Financials, and Energy displaying strong leading characteristics.  The strength of these moves post election have been epic in some cases which begs the thought of when will the logical mellowing/basing experience begin.  Realizing nothing in markets go up (or down) in a straight line we realistically expect a period of time where markets mellow at best, or more negatively, pull back.

The various market reactions offer the collective expectation of the new Administration economic policies, and follow-on backdrop, will be significantly different than of recent experience.  As we put this final Weekly View out for the year of 2016 our focus is on what is around the nearby corner for early 2017.  Markets can certainly get ahead of themselves, and in so doing can whistle past significant potential headwinds they later choose to revisit.

There is a litany of potential issues these markets can face (as there usually are at any given time) in the near-future but some are blatantly in our face so-to-speak in that they have been present and building well before the November election.  With this, we thought it timely to peek into 2017 by bringing a couple of them front-and-center via excerpts of previous Weekly View’s whereby we have shared them as issues or potential developing issues to be aware of.

With this we leave you excerpts below as well as a re-posted psychological invitation that certainly will be applicable for early 2017 as it was for the immediate aftermath post election 2016.  Importantly, these are big picture issues that do not change in a day, week, or even a month so monitoring their development will continue here in the Weekly View well in to 2017.  To you and yours – a very Merry Christmas and wonderful New Year!

Expensive Stock Market Via Valuations

Specific stock market similarities do exist and yet there is a significant disconnect between our current era and that of 1980.  Valuation levels then-to-now are a distance apart.  For the collective S&P 500 companies in the fall of 1980, the price paid relative to earnings was extremely low.  The price-to-earnings ratio (p/e) for the S&P 500 was registering in the vicinity of 8 times earnings while our current measure is three times as much equaling 25 times earnings.  With this, we are quite expensive relative to the 1980 time as well as through distant history.

Taking the total value of the stock market and comparing it to the size of the economy via the GDP measure, we see in 1980 stocks in total were valued in the low 30% range of GDP while currently our total stock market value is in the 140% range of GDP.  More simply, this means the total value of the stock market in 1980 was 1/3 the size of the economy compared to our current day’s total value of the stock market equaling 140%, or 1.4 times the size of the economy.  Either valuation measure speaks to how expensive our current market is compared to a previous era that ultimately ushered in a new long-term bull market which lasted nearly 20 years.  Off to the races stock market performance is by no means a slam dunk with high valuation levels, high debt levels, and rising interest rates.

– CAMS Weekly Views from the Corner – Have We Seen a Post-Election Market Reaction Like This Before? – November 27, 2016

Stagflation?

There is a small sample of weakening economic reports recently released.  This is not to say the economy is in a downward spiral.  Rather, when partnered with a developing inflation story, general weakness in economic releases brings the concerns of stagflation as prices rise while the economy softens.  This type of environment, if it develops further, is challenging for the citizenry as well as for markets generally and the stock market specifically. 

With high valuation levels of the stock market in light of a year-plus negative earnings growth trend while the stock market itself has held high levels has left it historically expensive when looking at the price of the market relative to the earnings it is providing.  Expensive stock markets from a valuation perspective (not a price only perspective) do not play well with economic backdrops such as stagflation.  Again, and importantly, this is a developing economic story, not a set-in-stone current reality. – CAMS Weekly Views from the Corner – September 23, 2016

Earnings Recession

As stated in previous Weekly Views, earnings growth for the collective S&P 500 companies is crucial going forward.  We have been on a multi-quarter earnings recession whereby the S&P 500 collective earnings have posted negative growth.  At this stage, to support the post-election expectations of strong economy and strong stock market, we need to see earnings growth kick into gear.  The next round of earnings will begin in early January along with the Inauguration and the beginning of said economic policies.  The next 60-90 days will be loaded with economic and market impacting news.

– CAMS Weekly Views from the Corner – Have We Seen a Post-Election Market Reaction Like This Before? – November 27, 2016

Invitation To A Psychological Stance

I invite you to drop any and all biases based upon certain belief systems you may hold relative to political structures and general emotions experienced as a result (in any direction) as it pertains to investment posturing.  What you believe should happen based on election results or maybe even want to happen (in any direction) in a hardened psychological view can very well lead you down some difficult roads with your investment results.  If there was ever a time to be nimble and stay flexible that time is now.

– CAMS Weekly Views from the Corner – November 13, 2016

I wish you well…

Sincerely, Ken Reinhart Director, Market Research & Portfolio Analysis Portfolio Manager, CAMS Spectrum Portfolio

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