Gamble Jones

Newsletter – Quarter 3, 2018

As French entertainer Maurice Chevalier once said, “Old age isn’t so bad when you consider the alternative.”  The current bull market recently became the longest on record after reaching 3,453 days on August 22nd.  The rally, which began in March ’09 on the heels of the financial crisis, has been described as the most hated bull market in history, as it has been saddled with doubt about its sustainability all along the way.  In spite of the skepticism, the market has proven to be resilient, successfully navigating its way through a number of challenges for nearly a decade now.

Though this bull market has certainly been historic, what really matters for today’s investors is where stocks go from here.  After such an extended run, the bull market is now undeniably a bit long in the tooth, but as the old Wall Street adage goes, “Bull markets don’t die of old age.”  The rally has been underpinned by strong corporate earnings and low interest rates, and it will likely take a change in one or both of those factors to bring it to a conclusion.

Boosted in part by tax cuts, corporate earnings have been exceptionally strong, with S&P 500 firms expected to post EPS growth of 22% this year (the fastest pace since 2010) and a still solid 10% next year.  The slow but steady economic expansion that is now the 2nd longest in history has also picked up steam, providing a fertile environment for earnings growth.  And while economic growth is likely to moderate a bit next year as the benefits from fiscal stimulus fade and the impact of any unresolved trade disputes begin to be felt, the risk of a recession occurring anytime soon appears to be minimal.  As long as the economy remains on firm footing, earnings should continue to be healthy.

The historically low interest rate environment of the past several years has also had a major hand in extending this bull market by making stocks more attractive relative to low-yielding bonds and allowing companies to borrow freely.  However, rates have been steadily creeping up as the Federal Reserve and other central banks begin to unwind the loose monetary policies put in place during the financial crisis.  The Fed is likely to continue the process of normalizing rates with further hikes in the coming months as the economy remains strong and inflation has picked up, recently reaching the Fed’s 2% target after undershooting it for several years.  We expect the Fed’s rate hikes to be gradual and for monetary policy to remain accommodative for some time to come, but rising rates are a risk to the market that continues to bear monitoring.

Another notable milestone that recently took place was the 10th anniversary of the collapse of Lehman Brothers, which many point to as the seminal event of the financial crisis and a catalyst of the worst period for the market during the Great Recession.  It serves as an important reminder that the market is cyclical and that its pendulum can swing the other way in a hurry.  Therefore, it is important for investors to remain disciplined and maintain a long-term perspective in good times and in bad.  As renowned investor Warren Buffett has said, “Be fearful when others are greedy and greedy when others are fearful.”  Along the fearful to greedy spectrum, we’d describe our current state as selective.  While the market continues to benefit from the backdrop of solid earnings growth and an accommodative interest rate environment, we recognize that there is a good chance we’re in the later innings of this bull market, that valuations as a whole are pretty full, and that the market’s returns over the next decade are not likely to be quite as robust as those of the past one.  As we have throughout the many investment cycles that we’ve encountered in our 62-year history, we will avoid reaching for momentum investments at the peril of long-term results and will remain focused on buying great companies at reasonable valuations.  Though fewer in number than at the start of the bull market, we continue to find such opportunities that should ultimately prove to be good long-term investments.

Sincerely,

Gamble Jones Investment Counsel

P.S. With the end of the year fast approaching, tax season is just around the corner.  In building portfolios that are tailored to our clients’ needs, we strive to maximize tax efficiency whenever possible.  If there have been any investment-related transactions outside of your account(s) managed by Gamble Jones that have generated a significant gain or loss for you in 2018, please let us know.  If you have tax-related questions, please consult your tax professional.  We are happy to work with clients and their tax professionals to maximize after-tax investment returns.