Yes, it might keep going up.

It also might not.

As you might guess, there is one particular question planners get all the time, but it’s one we won’t answer definitively: Where is  the market is headed?

Over the long term, stocks are good investments for most people to hold, and the historical data bear this out. But when asked for an opinion on the market’s direction, people are usually asking what’s going to happen over a much shorter period, like from now until the end of the year.

We understand why people ask. Financial advisors watch the market every day and keep up on all the news about the economy. So there is this expectation that we have some sort of forecasting ability.

Irving Fisher was an early twentieth-century economist. Milton Friedman, who won the 1976 Nobel prize in economics, called him “the greatest economist the United States has ever produced.” In 1929, three days prior to the crash, he said that “stocks have reached what looks like a permanently high plateau” (CNBC: “Spectacularly Wrong Predictions”).

Seventy years later, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market hit the shelves in 1999, near the height of the dot-com boom. We believe we will one day surpass 36,000 too, but considering that 17 years later we’ve “only” reached around 18,000, and have lived through the dot-com bust and the Great Recession, we’re not about to try to predict when that will be.

Then just a couple weeks ago, there were two conflicting headlines on a prominent business website: “S&P 500 hasn’t done this in 40 years—and it’s a bullish sign,” and “These telltale market indicators suggest stock prices are topping.” Well, which one is it?

We could keep having some fun with this, but you can see that the point we’re making is that market timing is an exercise in frustration more likely to be a detour on your financial road map than a great call.

An all-time high–how should I react?

The recent upward move in stocks comes at a time of immense uncertainty. Lingering worries about the global economic outlook haven’t subsided, China is still a concern, and Europe’s slow economic recovery and fragile banking system are problems that won’t soon be resolved.

However, the U.S. has been and remains the best home in what could be called a rundown neighborhood. It’s somewhat counterintuitive, but a post-Brexit-vote world may actually be helping stocks in the U.S., as nervous cash in Europe seeks safety in the U.S.

And it’s not all gloom. The U.S. economy may be expanding at a subpar pace, but it is growing, and the consumer is leading the way, which supports corporate earnings. More importantly, analysts are cautiously forecasting that the four-quarter earnings recession appears set to end in the current quarter.

So what should I do?

As the economic recovery enters its eighth year, the expansion is no longer young. It’s been a substandard economic recovery, global uncertainty is high, and we are in an unusual election cycle.

Because market timing is futile, we continue to strongly encourage a diversified portfolio that encompasses assets in the U.S. and abroad, as well as alternatives and bonds. We will eventually enter a recession. When? We don’t know, but it will happen eventually because it’s an inevitable byproduct of a free market economy.

The Strategic Edge approach

The asset allocation strategy at Strategic Edge, as mentioned, groups assets into four primary categories: U.S. Growth, Global Growth, Alternatives, and Fixed Income. The U.S. and Global categories look for growth-oriented equity investments but can also include some value-oriented investments to take advantage of companies with good growth potential that may also be undervalued.

Alternatives are used as a portfolio stabilizer. Broadly speaking, alternatives are assets that are not stocks, bonds, or cash. They are included in most of our portfolios as a hedge for when stocks and/or bonds drop, because when that happens, assets like commodities and real estate tend to have the potential to rise. So alternatives hedge against market volatility. Ideally, they earn a return at any time but especially when the market plummets, which in turn can help keep your portfolio balanced.

In the bond category, we look for well-performing, quality bond funds that can provide returns that meet fixed income needs.

How much of each category you have is dependent on your tolerance for risk.

Contact us any time for a free consultation to go over your financial goals and risk tolerance, and to see if our approach might be a good fit. We are located in Rosemont, Ill., near Mannheim and Higgins, and are also always willing to meet somewhere other than the office if that would be more convenient.

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Look up Strategic Edge Wealth Management, LLC and like our page. A few times a week, we share information on topics related to investing, retirement planning, money management and estate planning, and link to articles from business media that we think you might find interesting.

U.S. stocks ended mixed in February and have shown continued improvement so far in March. So things are getting better, right?

Some financial commentators are bullish. Some are not impressed and think the possibility of a recession is still fairly high. But economic forecasters can sometimes be compared to sports analysts predicting who’s going to win. They won’t all agree, they won’t all be right, and something could happen that surprises them all. If you are into the NCAA basketball tournament and have filled out a bracket showing what you are pretty confident is going to happen, we’re sorry to tell you that there’s only a 1 in 9,223,372,036,854,775,808  (1 in 9.2 quintillion) chance it will be perfect (businessinsider.com/odds-of-perfect-ncaa-bracket-2015-3).

So what should we make of the economy right now …

A standard economic principal is that healthy stock markets move higher driven by economic growth and increasing corporate earnings. Neither is really happening right now, despite the market recently rising.

Economic growth so far is 1%. The fact that some are calling that moderate growth shows how relative a perception it is.

Consumer confidence has not improved that much. Retail sales have been weak: Official data showed U.S. retail sales falling in February, and a previously reported rebound in January was revised to show a 0.4% decline (Commerce Department).

On the corporate side, the strong dollar has restricted economic growth in sales of goods outside the U.S.

Oil prices are rebounding some, but the category is still weak. Global supply has been outstripping global demand, and that oversupply is still growing. But note that it’s a problem of too much supply, not necessarily falling demand (which would signal the possibility of a global recession).

Employment is expanding as is participation, but most new jobs are part-time or in the low-paying services sectors.

There is overseas economic weakness.

And while the financial markets are doing well, a closer look reveals that markets are still rallying based on corporate buybacks.

The Federal Reserve finds itself unable to hike rates and has scaled back forecasts for how high interest rates will climb in 2016. Some even think it may need to lower rates again or introduce some kind of monetary stimulus to keep the equity markets going.

It is going to be an interesting year.

Perspective

If you are young, daily or weekly monitoring only lifts you up or brings you down. When you won’t retire for 20 or 30 years, today’s value doesn’t matter if you have a disciplined investment plan in place.

Many of you are nearing or in retirement. Our more conservative portfolios are designed to try to limit the downside in turbulent markets while still keeping some exposure that allows us to capture upside when stocks rise.

So try to avoid watching the daily ups and downs, especially with the high volatility we’ve been seeing. Warren Buffett has some good advice:

“Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” (Bloomberg)

While none of us enjoys seeing the market decline, it’s important to remember that it never goes up in a straight line.

The individual plans we recommend do not eliminate risks, but they do attempt to mitigate some of the risks in a volatile or down market.

Remember also that in addition to investment management, we offer full financial planning services. Please call or email our office sometime to see if we can get you started on a full financial plan. This kind of comprehensive look at your circumstances, assets, and goals will help us put you on the road to financial peace of mind.

How much does what happens in January matter?
According to CNBC, over the last 35 years, what the market does in January has predicted how things will turn out for the rest of the year 71% of the time (as measured by the S&P 500).

But that statistic reflects a much better job of predicting winners than losers, because markets are biased toward the upside.

Consider this: The S&P 500 Index has risen in 23 out of 35 Januarys since 1979. Over the next 11 months, the market rose in 19 of those 23 years—meaning a positive January successfully predicted a winning February through December 83% of the time.
But in years when January lost ground, there was only a 33% success rate in predicting a losing year.

There are plenty of reasons markets go up or down, and plenty of interesting but meaningless correlations, including whether the AFC or NFC team wins the Super Bowl this weekend (http://fortune.com/2016/01/20/super-bowl-predictor-2016/). So I don’t necessarily believe that January sets the tone for the year.

Over the longer term, it’s about corporate profits. The S&P 500 and corporate profits have a correlation of 95% over the last 100+ years, and right now corporate profits are barely growing.

Markets don’t rise in a straight line. So this is a typical correction, only it’s getting big headlines because it’s happening at the beginning of the year.

Why the poor start?
Economic growth slowed at the end of the 2015. Gross domestic product (GDP), the largest measure of economic activity, slowed from an annual rate of 2.0% in the third quarter to 0.7% in Q4 (preliminary data from the U.S. Bureau of Economic Analysis).

That has in turn forced analysts to cut back their forecasts for S&P 500 profit growth in 2016. Last November, analysts were forecasting a rise in Q1 profits of 3.6% (Thomson Reuters). By the time January ended, the increase had evaporated and analysts now foresee a drop of 2.7%. Losing ground in Q1 would make it the third straight quarterly decline.

The effect of oil prices
A huge part of the market’s weakness has to do with the near collapse in energy profits. It’s been great at the gas pump, but the losses in the energy sector have been a net negative for the economy, with steep cutbacks in oil and gas projects. Those cutbacks have in turn negatively affected manufacturing.

The reasons for the oversupply of oil and the steep price decline are too much to get into here, but a good overview is in this New York Times article: http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0

Lower oil and commodities prices may eventually end up increasing discretionary consumer spending – remember that the U.S. consumer is still about 70% of the economy – but that could take some time to see.

What the strengthening dollar means
The strengthening dollar is affecting sales and revenue for U.S. firms that do a lot of business overseas. A strong dollar is great if you’re planning to travel abroad, but it works against revenues for American firms because sales in local currencies have to be translated back into the stronger dollar. So this is another factor affecting corporate profits.

Will interest rates go up again?
The odds of another increase in March are slim, based on the Fed’s statements from their January meeting. They have somewhat downgraded their outlook on the economy, based on softer net exports and increases in manufacturing inventories. The Federal Open Market Committee is also less confident about reaching its inflation target of 2% (it’s trending lower than that), which they consider most consistent over the long run with achieving their mandate of price stability and maximum employment.

Looking ahead
Volatility is normal part of investing. A more aggressive portfolio can create better returns over the long term, but it will see higher highs and lower lows.

A more conservative approach can smooth out, but not eliminate, volatility. It may not capture the same returns over the long term, but it will allow the more risk averse to sleep better at night.

This might be a good time to review your goals and go over your portfolio. We can always adjust things based on your risk tolerance or a change in your goals or circumstances.

A recession, many believe, should be avoided this year. Housing is doing fine, consumers are buying, and wages are starting to go up – all good, steady indicators of general economic health. But the volatility is going to stick around for a while.

I hope you’ve found this review to be educational and helpful. If you have any questions or would like to discuss anything, please feel free to give us a call.