Question of the Day

As we write this, markets are breaking through all-time highs. Bullishness is rampant throughout the land. It is at times like this the media picks up on Gloom and Doom opinion pieces to grab eyeballs. Today’s version is the headline “Why the ‘Smart Money’ Is Bailing Out of the Bull Market”.
Our response as to why we are not bailing is that we are NOT Traders or Market Timers and we cannot predict the future. The market is high by many measures. By many of those measures, it has been high for several years. Our focus is on the income needs, long term objectives, and volatility constraints of our clients. Are we concerned about the level of equity prices? Yes, this is something that we think about constantly. It is why we are carefully making new investments, always looking for better relative value, and perhaps taking a more defensive tilt. That being said, here are three counter-arguments.
1) We agree with many of the pundits (Case-Schiller comes to mind) that yes, valuations are elevated compared to historical averages. However, we are not living in historical times. The central banks of the world, the US included, have massively deflated the value of currencies through quantitative easing and zero (or less) interest rate policy. In the traditional Capital Asset Pricing Model world, the value of a security, or any investment for that matter, is substantially driven by discounting expected future cash flows into the present. There are other factors as well, but what this means in a zero or near zero interest rate world, asset values could theoretically approach infinity. We are nowhere near infinity.
2) Though the US economy is weak, and earnings growth is slowing, US firms are making money, and the US continues to be the best neighborhood in a rough world. That is why Russian oligarchs, and other investors around the planet, continue to send funds to the good old USA.
3) Where is the smart money going to bail to? If, in fact all that “smart money “ heads for the exits, interest rates in the US will head for negative territory again, reflecting the situation across most of Europe. You will pay to have your money in cash or bonds. You will then get killed in bonds when rates go back up. This is precisely what happened last fall. Before the market rallied.
We take great issue with the assertion that “smart money is ‘bailing out” A better observation is that smart money is long-term, has a plan for the future and does not try to “time” the market. (Note that in the text of the article, the author states that “smart money” traders are bailing. The word ‘traders’ was lost when creating the headline.)
As the market stretches to new highs, this is the time to be cautious with new investments and rebalance to better values, but not a time to ‘bail’. If you are concerned that a market stumble will prevent you from achieving your goals, let’s make a time to review your financial plan and quantify the risks, as well as your risk tolerance.