Or is it simply a question of when? The equity markets are behaving rather enthusiastically of late and it begs the question of how long can this go. Since the question is on all of our minds, we dug up some statistics that tell just how unusual the last few months in the market really have been. Of course, the fact that we have data that tells us where we are compared to where we’ve been offers nothing about where we’re going. In other words, past performance doesn’t guarantee future results.
With the above in mind, we fully expect volatility to resurface sooner than later. Here are just a few points that lend toward that expectation:
- Corporate executives buying own company stock is at its slowest pace in 29 years. Insider corporate executive selling in companies that trade on the NYSE, NASDAQ and American Stock Exchange have triggered bearish signals for 11 straight weeks, the longest stretch since 2014. While, at the same time, short selling (a bet against the market) is at a 10 year low.1
- At a current P/E ratio of 26.64 (based on trailing twelve months earnings as reported), the S&P 500 is 70% higher than the historical average of 15.64%. Forward looking P/E based on forecasted earnings is 18.27, still over 16% higher than the historical average.2
- Equity strategists at Goldman Sachs Group, Inc. have downgraded their three-month outlook for stocks worldwide to neutral. “With growing momentum nearing its peak and rates increasing further with a hawkish Fed, the asymmetry for equities is turning increasingly negative.” Goldman sees a growing number of downside risks, including to equities stemming from so called risk parity, Bloomberg reported.3
- In the past 30 years, the average intra-year decline in the DOW has been 14.3%. At today’s DOW level of 20,900, that’s a 3,020 point decline.4
- The S&P 500 has failed to close lower by 1% or more since October 11, the longest such string of no-down-1-percent-plus days since the one ended in December 1995.5
So…what to do in anticipation of volatility? Our philosophy in today’s environment is not to get too defensive, but to mix-up the offense. We’re not advocating selling and sitting on the sidelines, rather we are rebalancing portfolios to include more alternative asset classes. Alternative strategies may help reduce volatility by exposing part of a portfolio to investments that have low correlation to the broad equity markets.
In summary, we continue to be optimistic about the mid and long-term prospects of the equity markets. Short term volatility shouldn’t dissuade us from staying our course, but should encourage us to analyze our current allocation and introduce strategies that may help minimize volatility. That’s’ what we’re doing behind the scenes, and we encourage you to give us a shout if you want to talk it through.
