Research Director Monthly Commentary: November, 2017

Wow, November and holidays already ! …… seems like this year has flown by. Along the lines of “flying” we’ve seen some “flying” in the stock market this year, to wit: YTD, the S&P500 is now up by over 15%,  well above the long-term average annual return of about 10%. At about 18x forward earnings estimates, valuation for the S&P500 is elevated but not at “nose bleed” levels. As long as the economy and corporate earnings continue to grow, which we expect, we believe the stock market overall can continue its upward path.

 We’ve seen the stock market wobble a bit in the past few days largely due to concerns that the Trump administration’s proposed tax plan could be delayed. There does seem to be the political will to get a tax package through Congress but it is difficult now to know or predict its final form. We believe there is a certain level of investor expectation of a tax package this year and if it fails, it could result in a modest market correction.

Speaking of corrections, one unique characteristic of this stock market over the past several years is the lack of corrections, or let’s say, much lower frequency of such. Corrections are a normal characteristic of any market. Since 1900, corrections (meaning: pullbacks) of 5% or more have historically occurred about 3 times a year, while corrections of 10% or more have occurred about once a year. Interestingly, we have not had a correction of either magnitude since August 2015. Some market pundits are predicting that we are overdue for a correction, and base on history, would appear to be true. The problem however, is we cannot predict when one will occur or its magnitude. Is that a “risk”? Yes. Can we prepare for such a “risk” actually occurring? Yes and we do.

One of the best ways to prepare for market corrections is to invest in a portfolio that is diversified across several asset classes. We do this for all of our clients. These asset classes (stocks, bonds, commodities, real estate, etc.) have varying return correlations and, when held together, can help to dampen portfolio volatility and hence provide some level of protection from market pullbacks. But it is not “buy and hold forever” strategy. We meet quarterly to assess the market and economic outlook and from this meeting make tactical changes to our holdings within each sector to best position clients for what we see coming over both the short and longer-term. The goal is to deliver improved risk-adjusted returns (meaning return per level of risk taken) which, we believe, is the most important measure of return in wealth management.

Financial Planning: In the financial planning area, one of the bigger issues we have been dealing with for our clients is the issue of low yields on bonds. Historically, most retirees have relied on a higher portion of bonds in their portfolios to provide income. With the drastic decline in interest rates over the past 10 years, bonds no longer provide an adequate level of income. There are several things we have been doing at S.R. Schill to compensate for this situation: 1) tactical allocations across term structure of interest rates; 2) having some exposure to short-term high-yield bonds; and 3) increasing our holdings of bond surrogates and hyrids, such as preferred stocks.

Robert Toomey, CFA, CFP

Vice President, Research
November 10, 2017