The stock market has continued its advance in January. Despite calls for a moderate year and fears of a pricey market, stocks are on track for the best January in 20 years.
Why? The kindling has been strong fundamentals. We have low interest rates and unemployment, rebounding home prices and consumer confidence, and, earnings are growing. The fuel has been tax reform. It has created expectations of lower taxes, hence higher earnings. In addition, the repatriation of cash to the US is expected to fund investment and growth. That means higher wages and job growth and consumers with more cash to spend. The accelerant? Next on the agenda is an infrastructure bill. Trillions of dollars are needed in government/private partnerships to rebuild aging infrastructure. The idea is to have minimal government outlay and create incentives for private investments. We recently took profits and repositioned to get more exposure to industrials.
Is it sustainable? Despite being in the later stages of a long term bull market, there is room to run. There are many great companies here and abroad – and overseas markets are still 1-2 years behind ours.
So what are our concerns, what are we watching? We are watching interest rates, they can and should rise to more normal levels, But, without excessive inflation, they will remain near historic lows. As long as rates rise because of real growth and demand for money, the markets will continue upward. But, if they rise for the wrong reasons and/or get too high relative to the yield on stocks – look out. Our biggest concern is irrational exuberance and euphoria. Most of the recent market advances have been met with skepticism and worries of global economies collapsing back into a recession or worse. Markets have climbed the “wall of worry”. Recently consumers and investors have started acting more confident and self-assured. Could it be greed overtaking fear? If the markets start to accelerate without fundamental reasons, it’s a warning sign! We can tell by the phone calls we take and people we talk to. I have seen it many times before. But, for now, it seems like there are still enough skeptics to go around.
So, we’ll keep our portfolios fully exposed, where appropriate, to equities. We’ve taken advantage of gradual rate increases to add high quality fixed income and gold as insurance. We will continue to do so as opportunities present themselves. But, for now, the beat goes on.
Thank you for your business, trust and confidence. We always love to hear from you, if you have any questions, let us know.
Donald J. Phillips, CFP®
Greater Midwest Financial Group, LLC.
3222 Rice Street
St. Paul, MN 55126-3047
Phone: (651) 490-9790 Fax: (651) 490-9788