Greetings! With May and June in the books, the summer has officially arrived. In addition to rising temperatures, stock valuations continue to climb towards the very top of the proverbial valuation thermometer. While we certainly want our clients to participate in stock market gains, equity valuations are becoming stretched on nearly every historical measure.
While we remain constructive about stocks presently, it goes without saying that we are becoming more defensive as valuations continue to tick higher. Stocks are an important inflation hedge for long-term investors, but getting aggressive near all-time highs back in 1999 and in 2007 proved to be disastrous for retirement investors.
It took years for investors to get back to break even after the above referenced bear markets, and as a result of our historical understanding, we are growing cautious. I want to be clear in stating that we are not scared or nervous, but we are viewing stock market valuations from a prudent, historically factual basis.
Our market view is based on historical facts and is void of any emotion. We recognize that valuations could continue to move higher and we have our clients’ portfolios allocated to participate in further upside. While we maintain stock market exposure, we simultaneously remain underweight asset classes with high levels of historical volatility. We are also avoiding equity asset classes where historical portfolio risk measurement methodologies dictate high portfolio drawdown characteristics during major market downturns. While we are currently positioned defensively, the U.S. stock market performance through the first half of the year has been solidly positive as shown below:
With the second quarter of 2017 ending in positive territory, it will be critically important to remain vigilant as to whether equity market valuations continue to expand to the upside for the remainder of the year. Essentially, if we are defensive at current levels we will get more defensive if prices continue to move substantially higher for common stocks in the United States.
From a political perspective, we believe that should tax reform occur in the manner in which it has been initially described, then we would expect a positive impact on the overall economy. However, until more details are known about tax reform and the final law is drafted and passed, it is nothing more than speculation to surmise future financial market reactions.
In closing, I wanted to thank all of the sponsors, participants, and volunteers who helped make the 15th Annual Timmy’s Mountain Just Because We Care Golf Tournament a success! Our special children in Honduras are thankful for all of the support and assistance provided by all of their supporters! With the summer heat already upon us and strong equity performance at our backs, please remember to stay healthy, wealthy, and wise, and certainly . . . stay tuned.