U.S. Stocks: Onward

Calm in the markets is defined as relatively small movements in daily prices.

Like the persistence of a 1960’s war protestor, U.S. stocks continued climbing. Growth was generally steady in U.S. stocks throughout the quarter. Looking more closely at the numbers, stocks of small companies (small caps) returned 5.7% for the quarter while large companies returned 4.5%. Growth stocks outpaced Value stocks in Q3, but by lower margins than in Q2.

As the market’s rally continues, an increasing chorus of predictions are saying that we are due for a correction. Like a watch that’s stopped and is therefore right twice a day, the stock prediction will inevitably come true at some time. Here’s what to be aware of as time progresses:

  • The price-to-earnings ratio of the S&P 500 has slowly climbed to 17.7, which is higher than it has been since 2004. While the P/E ratio is an unreliable short-term market gauge, an elevated P/E usually predicts lower future returns.
  • The Federal Reserve continued talking about increasing interest rates and announced it would no longer replace the maturing bonds they purchased to stimulate the economy after the financial crisis (more about this in the bond discussion later).
  • U.S. savings rates are down, which could indicate that consumers are feeling a little stretched. On a short-term basis, we’ll see how retailers fare in the upcoming holidays, but sales could be slower than expected.
  • On the positive side, employment is healthy and there is still a prospect of some tax stimulus coming from Washington. Corporate earnings have also been strong.
  • American goods are now cheaper abroad given the relative decline in the value of the dollar. Theoretically, this should lead to more growth in our exports.

Despite the uncertainties it is always best to stay in the stock market with the allocation we recommended for your specific circumstances. Although we don’t know when, we do know that stock prices will eventually drop and we’ve factored the probabilities into your planning. Always keep the long-term view in mind.