Market Top? False Recovery?

“I think the market’s expensive,” said my New York friend and colleague Sheldon V. The S&P 500 has made five new all-time highs this year, and bond yields have remained stubbornly low despite the Fed’s threats to raise rates. Economic data remain uninspiring and the economic environment feels sluggish. Investing requires a combination of analysis and intuition, and investors are perpetually torn as to whether to trust data or feelings.

New and existing clients are making large deposits to their accounts but are asking if now is really the time to put money to work. Anxiety among investors is increasing which, oddly, usually means that there is more upside ahead. A dearth of bearish sentiment is the classic harbinger of ill things to come.

When feeling confused, it sometimes helps to consider additional data. It is important to actually consider the data objectively and not just as support for a current prejudice. Look past the economic headlines and one discovers potential emerging positives. The apartment rental market is improving.

An article posted on CNBC’s web site (“Why Your Rent Will Rise Again This Year“) reports that rents are going up. “Renting has gotten increasingly expensive over the last five years. The average U.S. rent has climbed 14 percent to $1,124 since 2010, according to commercial property tracker Reis Inc. That’s four percentage points faster than inflation, and more than double the rise in U.S. home prices over the same period.

Now, even with a surge in apartment construction, rents are projected to rise yet another 3.3 percent this year, to an average $1,161, according to Reis. While that’s slower than last year’s 3.6 percent increase, the broader upward trend isn’t going away.”

Increasing rents provide support to home sales because the relative costs of home ownership decrease as rents increase. Potential renters often learn that buying a house or condominium may not cost much more than an apartment. But, economically speaking, this remains an incomplete equation. The missing element is confidence. The renter and would-be home buyer must have the confidence to assume the long-term liability of home ownership. He must be confident in his current net worth, and he must be confident in his job. He has to believe that he will be able to maintain his earnings. The article on CNBC.com is worth the read.

Stocks are high. If the economy is really expanding, and consumers are consuming because they have increasing income (and not just increasing debt), then maybe stocks are priced appropriately and will go higher. But maybe not. We have expressed our concerns about stocks for a good while and remain defensive. Now, once again and after many false starts, investors are hoping that economic growth may be accelerating. Our cautiously optimistic fingers remain crossed. What should we advise the nervous about investing now? I’m reminded of Freddy Towers’ great advice, “Buy stocks when you have money, and sell stocks when you need money.” Long-term, Freddy’s advice is probably the only advice you’ll ever need.

No one ever has any idea what stocks will do over the next six months, year or two years. They could go up or down 20% or more from current levels. Equity investors rely on the expanding foundation of US and global commerce. As it grows over many years, corporations grow, and owners of those corporations are rewarded. JP Morgan advised a worried, sleepless stock owner to “Sell to the sleeping point.” Morgan made a crucial point: the psychological fortitude to invest is always the key. Know thyself because most often your emotions will be the undoing of an otherwise successful investment plan.

Yes, I would buy stocks now if I had money to invest for the long-term. I may consider averaging-in over the course of the next year, but I have to recognize that my timing will likely provide greater comfort to me than it will value to my portfolio.

As the markets continue to make new highs, complacency and arrogance are the greatest foes. Remain vigilant and alert. Markets always go down, sooner or later. Make sure you have a chair nearby when the music stops.

Peace,

Michael