The gorgeous summer we have been experiencing has occasioned a coincidental but still very welcome rise in the value of our investment portfolios. New record high total market values were recorded by most clients in recent weeks. Last quarter I wrote that worries of an imminent market correction could easily prove to be exaggerated. I am certainly glad not to have been exactly wrong in that assessment. Nevertheless, the market will pull back some day, sooner or later. The good news is that your long term net worth almost certainly will not be impacted significantly by ordinary and expected market fluctuations. Meanwhile I am working behind the scenes to structure your portfolios to experience somewhat less downside risk than average without sacrificing too much upside growth potential.
The factors today that support increased caution over stock price levels are rising interest rates and the very long duration of this bull market. Offsetting those factors are corporate tax cuts and strong earnings (which help keep stock price-to-earnings ratios low enough). In addition, bond price declines associated with rising interest rates could force capital out of the bond market and into stocks. I empathize with clients who are feeling anxious about perceived growing risk levels. But in my judgment risks and opportunities remain well-balanced in financial markets.
It is perhaps easier in good times like these to reflect that your portfolio "balance" or "total market value" represents a snapshot reading of auction price levels. Financial markets are auctions that are open every day and depend on voluntary bids and offers from individuals and institutions who own securities or want to buy them. It can be tempting to visualize a portfolio market value to be the same as a balance listed on a receipt from an ATM, but that would be a mistake. Market values always fluctuate. Higher highs in positive markets lead to higher lows in down markets. Rest assured that the internal compounding of your net worth is a constant process that happens over time, notwithstanding unpredictable short-term market fluctuations.
Mark Lloyd, Ph.D.
Vice President & Portfolio Manager