If you follow the same “experts” I do regarding the market, then you’re probably hearing the same mixed reviews I am. Half of the experts are saying, “we’re running up to our 10th year of a bull market, its going to crash soon.” And the other half are saying “There aren’t any indications of the market slowing down anytime soon.”
The reality is, that they both might be right. Predicting a crash is extremely difficult, and if someone is saying there will be a dip in the market, the reality is that they will be right, we just don’t know when they will be right.
If we don’t know when the market is going to take a dip, lets try to be strictly analytical. We know that GDP in 2017 grew at 2.5%, which is up from the average 2.2% since 2008. In October of 2017, the unemployment rate was at a 10 year low of 4.1%. And the personal savings rate in Q4 of 2017 was 2.6%, the lowest it’s been since 2005.
The pessimist would take this information and say, with unemployment being at an all-time low, GDP growing, and the savings rate being at a 10-year low, consumers are in over their heads again and we are due for a correction soon.
But this take on current economic conditions overlooks many key points.
One point being, in December of 2016, the personal savings rate was 3.2%, the lowest its had been since January of 2008, since then we had the strongest year since the 2008 meltdown. And the 3 years prior to Jan of 2008, in a bull market, the personal savings rate never broke 3.8%. What this really tells us is, in a strong bull market, consumers are placing less in traditional savings, and more in market correlated savings, such as IRAs, 401ks, and even unqualified brokerage accounts. None of these types of accounts are considered in the personal savings rate.
This strengthens are second overlooked point. Consumers don’t just get purchasing power from their income, but also their assets. Assets values sored in 2017 as the S&P 500 rose by $3.7 trillion and owner occupied real estate grew by $1.5 trillion. Such massive growth could be a concern if both the market and real estate were to be overvalued. However, a capitalized profits approach indicates that the market is still undervalued, and the price to rent ratio for residential real estate is near the long-term norm. Keeping in mind that it was highly over valued from 2005-2007.
The last thing I’d like to point out, is the anticipated $200 billion tax cut for 2019. If there is one thing we know to not be sceptic’s view it’s this; $200 billion not going to the government means consumers will have $200 billion in their pockets, which is a lot of money to invest and spend.
What can you do to help yourself sleep at night? Keep a balanced portfolio of fixed income and equities based on your tolerance for risk. Include a couple alternative investments (not more than 10% of your portfolio) with little to no market correlation to hedge against corrections. Most importantly, keep in mind that the market has always bounced back from every correction, dip and crash.
Sources:
https://fred.stlouisfed.org/series/PSAVERT
https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/