The market continues its upward drive with the Morningstar index up 14.10% for the year and up 4.53% for the quarter. Year-to-date the large companies are leading the way up 15.09%. These are great numbers and as of Monday nights close they are even better. On October 9th we will have the 10th anniversary of the market high for the S & P 500 before the "Great Recession". The market bottomed two years later on March 9th with a 40+% drop from the peak. According to Brian Westbury, the economist at First Trust, if you had a choice of investing in the S & P 500, a 10-year Treasury note, Gold, Oil, Housing, or Cash, you would have done best in the S & P 500 with an annual average gain of 7.2% essentially doubling your money in 10 years. Gold returned 5.7%, the Ten-Year Treasury 4.3%, Housing about 1%, Cash averaged .4%, and Oil lost 4.3%. These numbers reinforce my belief that for the long-term investor the stock market with all it volatility is worth the heartburn. A Ten-Year Treasury would be coming due now and the renewal rate is only about 2.3%. We need to have our returns be greater than inflation so while the Treasury is safe, with no heartburn, its current return is not enough.
The Fed has said that they will start to unwind its bloated $4,500,000,000,000 balance sheet. If they are successful they will have done something never done before. They have basically printed $4.5 trillion dollars, but in a way that has not resulted in the runaway inflation of the Weimar Republic (Germany before WWII) or any other country that has ever printed money. I will not bore you with the nuances of their statement but they will start "small" by not reissuing the maturing bonds at a rate of around $30,000,000,000.00 a month. These numbers are so large it's hard to comprehend. With all the damage done by our recent hurricanes and the Federal funds that will be spent to help the affected people (FEMA and Flood Insurance) it is hard for me to believe the "shrinking" will start as soon as they plan. The economics of insurance will be coming due. The corporate insurers largely left the hurricane areas in Florida because of unreasonable government rules. Now the government will pay, my guess is poorly, for covering losses that are immensely greater than premiums collected. That said, unemployment is down, inflation is low (actually lower than what the Fed's want) so I see nothing to prevent companies continuing to increase their profits. As profits go, so goes the market. While valuations are high, I remember Peter Lynch's (the first manager of Fidelity Magellan Fund) famous quotes, "People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences." and "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
Now that the Republicans have failed to correct Obamacare maybe we can have a bipartisan health plan that makes sense. It is clear to me that both parties need to be cleaned out and replaced with people who are more concerned about us than their re-election. Keep your fingers crossed. As usual Keith, Bill, Kathy and I thank you.
Willis G. Ashby, CFP®
P.S. On a personal note my youngest child graduated from college last May and I am so happy.
References: Bloomberg, First Trust Advisors, TD Economics and Morningstar