With the S&P 500 hitting new intraday highs, these are great times to be invested in domestic equities. But what, if anything, could go wrong?
Hello, my name’s Paul Carroll. I’m the CEO and founder of Efficient Wealth Management, a boutique wealth management firm here in south Texas.
Today is Friday, August 24, and the S&P 500 hit an intraday high of 2,873. It’s too early to tell how it’ll end the day or the week, but clearly the market is bouncing along new highs as we progress. What is going on? Well, the world is healing. It is post-2008, and there’s a strong domestic and international economic tide. It is definitely raising all boats. Yesterday, Fed Chairman Powell indicated that inflation is not really a concern. Now that may or may not be a slightly political statement to protect the independence of the central bank, but he was quite clear in the need for moderated rate hikes. Not too quick, not too slow. Clearly, with the significant tax cuts adding even more liquidity to the markets, there is a need for interest rate hikes, and the Fed gets that. But they’re not worried about immediate inflation, and these statements have buoyed the market somewhat. But the fact that they buoyed the market still makes the point that it is very much a monetary policy market that’s going on here.
This market is a little bit reminiscent of 2007, but we’d had a long and strong bull market, and as we begin the unraveling of quantitative easing, are we going to be taking the fuel off the fire? It’s going to be tough for the Fed to remove dollars from the market without some form of correction. And tax cuts will necessitate higher interest rates so that inflation doesn’t take off in the midst of an economy, not just domestic, but to a lesser extent global, that’s running on all eight cylinders.
It is very easy to forget during these times of exuberance that the higher they fly, the harder they fall. We’ve enjoyed great domestic equity returns, but diversification still matters. And not just any diversification, but diversification in what we call noncorrelated assets, that is, assets that do not move in lockstep with the stock market. Most significantly, international diversification, real estate diversification, and fixed income, though because interest rates are rising, that fixed income must be short—short-term bonds, short-term treasuries, short federal notes.
Strong bull runs tend to be very concentrated, and so do strong corrections. Though diversification can be seen as the spoiler, it always wins the war with long-term, risk-adjusted returns that stick. This is something that we all learned in 2008.
My clients are going to be receiving a report fleshing out these concepts in the next three to five days. For both my clients and the rest of you, we wish you the best of investing success. Thank you.
Source:
DeCambre, Mark, et al. “MARKET SNAPSHOT: Dow Rallies 130 Points As Powell Defends Gradual Rate Hikes; S&P, Nasdaq Hit Records.” Morningstar.com, 24 Aug. 2018, www.morningstar.com/news/dow-jones/TDJNDN_201808245875/market-snapshot-dow-rallies-130-points-as-powell-defends-gradual-rate-hikes-sp-nasdaq-hit-records.html.
