Too Much of a Good Thing

Mae West said, “Too much of a good thing can be wonderful.” Last night marked President Trump’s first address to a joint session of Congress. While it wasn’t a State of the Union Address, it was a very important speech. The American people, investors included, were looking for some clarity and direction from the new president.

In his address to Congress last night, President Trump spoke of a trillion dollar infrastructure plan, the repeal and replacement of the Affordable Care Act, a major tax cut to decrease the tax burden on corporations and the middle class, and a historic military build-up among many other topics. Although there was little that was new in terms of policies the President supports, there seems to be recognition that parts of his pro-business agenda may actually be implemented. The President called for unity between parties and struck a softer tone than we have heard in previous speeches. Markets liked the President’s message and his tone.

The Trump rally has been re-fueled, and indices are surging to new highs. As I write, the Dow Jones Industrial Average is up almost 350 points and is above 21,150. The S&P 500 is moving higher as well piercing 2,400 and is now selling for more than 22 time earnings. Oil is lower, bond prices are lower, but the dollar is a bit higher.

Many are wondering, how far this rally can really go?  How long will it remain safe to be invested in this bull market? Last week on CNBC’s Power Lunch , I was having a very similar discussion during the inter-day stall in the bull market. In it, I cautioned that it would be unwise to bet against any well-established trend. As I’ve said in   previous market commentaries , although stocks may be expensive, they can always get more expensive.

This morning, I received an email from a client asking if it was time to start thinking about taking profits. Although I understand these feelings as the major indices continue to reach into uncharted territory, I replied that market timing does not work, but short-term funds should never be invested in long-term investments.

If there is a need near-term for liquidity, whether the market is at historic highs or lows, cash sufficient to meet short term needs should be set aside. If short-term needs correspond with market highs, raising funds becomes much less painful. But don’t let your jitters drive your investment decisions.

Long lasting bull and bear markets come with inherent risks. We often caution clients about the perils of emotion: emotion is the foe of the long-term investor. It nearly always leads to the wrong conclusion. Eight years into the current bull market and the insidious effects of hindsight can make investors feel that they’ve been mistaken and should have taken on greater risk. Of course, the opposite occurs after a prolonged bear market when those very same investors suffer the self-loathing hindsight of having had too much risk. Ensuring that your boat is prepared for bad weather doesn’t make you foolish or wrong just because there wasn’t any bad weather.

At market extremes it is critical to keep your wits, and review the quality and merit of each investment you hold. Please enjoy the new market highs and your increasing portfolio values. Plenty of prognosticators have called plenty of market tops, expecting an immediate downturn. The old joke is that Fred has predicted 25 of the last 3 market tops.

Each and every day our dogged, disciplined, dispassionate research continues. We look forward to celebrating continued new highs but will remain vigilant for the day when they stop.