Investors Perk Up As The Stock Market Hits A Historic High

In The News...

The S&P 500 index, the most widely cited proxy for the overall U.S. stock market, closed this week at a historic price level: 2,500.

This marks another record high for 2017. The S&P had flirted with 2,500 back in late-July and again in early-August, but never actually touched this big, round number. The S&P is up +13% year-to-date (including dividends) with 3.5 months to go.

Confidence rising: This comes as investor optimism grew to the highest level since last Nov. 2016, according to the latest weekly survey conducted by the American Association of Individual Investors (AAII). In this latest poll, 41% of investors say they are bullish while just 21% are bearish (the remainder feel "neutral"). Just a week earlier only 29% were bullish and 36% were bearish, so those figures flip-flopped in a matter of days. In fact, it was the largest weekly positive change from bearishness to bullishness since July 2015... 7 years!!! For whatever it is worth, back then the S&P responded by see-sawing for a few weeks before ripping off a +30% rally from Sept. 2010 to Feb. 2011. Of course this is not predictive of what is to come.

Is it coincidence that investor confidence spikes as the stock market sets a record high? No. This is normal. Bullishness and market gains go hand-in-hand. As investors become more upbeat they are more willing to invest, which increases stock market demand and pushes prices higher. As stock prices rise further, investor optimism swells. And so on, and so on... It is self-perpetuating.

This certainly bucks the seasonal tendency for September to be a bad month for stocks. Of course we are only at the midway point, so a lot can happen in the next two weeks. But the long-term view continues to favor the upward trend, particularly as we near the strongest quarter of the year, October-December. More on this in the OPINION section below.

In The Market...

The S&P 500 gained +1.6% this past week. Let's look under the hood:

(price data via

STOCKS: A strong week for the broad market. The S&P started the week higher and never looked back. Every sector gained except Utilities, and even Utilities were only down -0.3%. Financials bounced back nicely, rising +3.2%. This was good to see given many client accounts own Financials.

BONDS: Last week I suggested that interest rates might begin to rise and that is precisely what happened this week. Long-term Treasuries fell -1.7%, while Investment-Grade Corporate Bonds (one of our core holdings) slipped just -0.2%. High-yields and Preferred Stock both gained, following the lead of the stock market as they tend to do.

What's next? Most accounts have a cash position ranging from 20% to 50% of their total portfolio. In most cases this stems from the Treasury Bond fund (TLT) we sold last week. I am being patient as it relates to our next allocation. There are a couple different funds I am considering -- Preferred Stock (PFF) being one of them and Emerging Market Sovereign Debt (PCY) being another.

The Sovereign Debt bond fund would be new to our investment lineup. I have been meaning to expand our menu of bond options and I think this could be a good one. The dividend yield right now is 4.9% and would diversify nicely away from High-Yield Bonds (JNK) and Preferred Stock (PFF), two funds we regularly use but are a little too correlated for my liking. I will dig into the chart for PCY and its fund details over the weekend.

In Our Opinion...

It is funny how often I hear pessimism as the market hits new highs. A week does not go by without someone expressing how nervous they are about the market taking a precipitous fall. To this I repeat two of my beliefs:

  1. Pessimism continues to fuel the market higher.
  2. New market highs are bullish.

This is not to say that the market will not fall. Ultimately I have no idea and neither does anyone else. But my analysis continues to suggest otherwise. Rather than bore you with the various stats and trends that support this, here is what I think is occurring, subjectively speaking...

  • When the market begins to rally like it did post-election, those already invested have a decision to make: Do I invest more, stand pat or sell? Evidently investors either chose to stand pat or invest more, based on the market's continued ascent.
  • Meanwhile, investors who have remained on the sidelines have a different decision to make: Do I finally invest NOW or do I wait? Their hope is that the market will fall and they will be able to buy at a discount. They do not want to be burned by buying at what they think could be a market peak.
  • Reasons vary as to why so many investors continue to wait. For some, the wounds from 2008 remain fresh. These folks do not want to get caught again. I get that sentiment, but unfortunately time is going to waste. For others, the media they consume plants seeds of pessimism. Unfortunately a lot of market-related media is cynical, uneducated garbage that steers people toward poor decisions.
  • Smart investors understand that new highs are bullish, so while they might pivot between investments over time (as we often do) they do not hit the exits altogether and move to cash. That would be unwarranted right now, in my view.
  • Market analysis aside, investors usually have to become euphoric or complacent before the market tide shifts. To use a cliche example, if your taxi cab driver recommends a particular investment, it might be the wrong time to invest. I do not know when the overall market will reach a point where everyone is all-in, but it does not seem we are there yet. Meanwhile, the market climbs higher.

In Our Portfolios...

Q&A/Financial Planning...

Start planning for tax season by estimating what you will owe for 2017. Do this now and there is still time to make investment changes, as well as other decisions, prior to year-end.

A number of clients have asked about capital gains -- relating to both the investments we manage and those held elsewhere. If you own a brokerage account with us (meaning non-IRA) there are ways we can limit your tax hit if you have sold stocks or other property for sizable gains this year. There are also other measures you can take as well, such as increasing your contributions to tax-deferred accounts (e.g. 401k, IRA, deferred compensation, Health-Savings Account) or making tax-deductible charitable donations.

As December nears, I will be looking at each client's brokerage account and assessing ways to tax-loss harvest, which is to intentionally sell certain investments at a loss in order to offset previously realized gains. If you have other brokerage accounts outside of what we manage it is imperative to integrate those results because capital gains and dividends are lumped together across all accounts for tax purposes.

If you anticipate major life changes next year - such as one spouse will work less or one will earn significantly more in 2018 vs. 2017 - you might be able to pull some spending/savings decisions into this year or push some out to next year in order to take advantage of those changes.

What's New With Us?

Next Friday marks the first day of Fall. We have had a great Summer in many ways and are excited to end the year strong.

Have a great weekend,

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Brian E Betz, CFP®