Market Commentary October 2016

“The Seinfeld recovery continues…this has been a recovery marked by nothing: No great spikes in job growth, investment or productivity.” -The Dividend Advisor, Oct 2016

“We’ve been beating on the “market is overvalued” drum for quite some time now.  We find it interesting that just this month Money magazine is now suggesting the same thing.  “Stocks are frothier than they’ve historically been, yet many older workers are still too aggressive in their 401(k)s.” – Money Magazine, Oct 2016

Below is the Shiller PE chart (from multpl.com) showing the current inflation-adjusted valuation of the S&P 5001.  While the historical value is on the high-side, we believe it still is not up to “bubble” levels just yet.

Shiller PE Chart
Chart from http://www.multpl.com/shiller-pe/

 

In our opinion, the bottom line is that we need to see corporate earnings growth soon for the overall stock market to justify its current valuation.  Earnings seasons is upon us, so we are hoping for the best (but are prepared for the worst).  It will be interesting to see what November will bring…

Of course, what’s on most people’s minds this November, is the US Presidential election.  While the debates and mud-slinging provide entertainment for some, the economy keeps trudging along.  In the words of ThinkMoney: “The economy is going to do its thing no matter who’s in office.”

And then there are the banks of the world.  Over the summer, there were a few scattered articles referring to how many large banks are becoming over-leveraged, much as they were before the 2008 housing crisis.  One bank that stands out is Deutsche Bank in Germany, whose derivative exposure reached $75 Trillion (that’s with a “T”) at one point over this past year (cnbc.com).  In the US, Citibank is the top offender, far outweighing many other domestic banks.

Some observers think this means the next big crash is looming right around the corner.  Others feel that governments won’t let another big crash or “great recession” occur, and therefore this is not a cause for concern.  We think it is an interesting point to note, especially since it plays into the bigger picture theme of caution we’re keeping in mind.

Our V3 indicator is currently suggesting a “balanced” approach to the last quarter of 2016.  Given all that is going on in the world, we feel comfortable with that and will continue to keep a cautiously optimistic view going into the fourth quarter.

 


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