Starting the first two days of October, as the writing of this article, the stock market continues to frustrate. However, before we dive too deep into our outlook, most of Sound’s investment models have done very well. This means that you, our clients, have made good money in 2019. This is a testament to our Rules Based approach that has allowed us to mitigate risk and capture good returns on your behalf. Our models give us a playbook for both good markets and bad. Of course, as we have said many times “we still don’t have a crystal ball.” Yet, we have a forecast and rules to make disciplined decisions regardless of what the market throws our way.
Now, the big question is “how is the outlook going forward?”
Three of our four investment frameworks are negative. Before we go any further, remember we have a playbook for this too.
Our view of stock market valuations is negative due to the fact that the US stock market to US GDP is at 140.4%. Essentially, if the stock market is the scoreboard for the US economy this number should be somewhere near 100%. Therefore, take this number at face value as it is overvalued by 40%.
Before any of us panic keep in mind that this value was at 146% a year ago. It simply tells us that the US stock market is expensive right now and is not a time table as to if or when it will revert to its long-term average.
When we view the US economic activity, we want to know if the economy growing or shrinking. The leading indicators (ECRI weekly leading index) still show a slowing economy.
So, how is the overall market sentiment? Well, as I write this, it feels terrible. I stress the word feels because the first two days of the month have seen a tremendous sell-off. Yet, we do not want to make emotional decisions. Therefore, we look to our rules. Our rules have given us a “risk-on” signal. Yet, our overall outlook on the US stock market is negative. Low volatility, high-quality stocks are holding on but fast-moving growth positions are taking it on the chin.
Do we have any bright spots? Yes. The Fed is lowering rates. They have powerful tools to push economic growth and they have started to use them. The news has reported some progress on Us/China trade talks, though impeachment reports are taking the headlines. Lastly, as 2020 is an election year, politicians will want to drive economic growth as they seek reelection.
The following is our investment team’s full report. As always, we appreciate your trust in us to work with your financial plans and manage your investment money. We do not take this trust lightly.
We appreciate you!