Rational Exuberance?

December 12, 2016
On Friday, December 9, all three major U.S. stock indexes ended at record high. For the first time in five years, they each posted gains every day of the trading week.[1] The S&P 500 was up 3.08%, the Dow added 3.06%, and NASDAQ increased 3.59%.[2] International stocks in the MSCI EAFE even gained 2.9%, despite potential risks from the Italian referendum and impending end of the European Central Bank’s quantitative easing.[3]

From our vantage point, we see a rally that appears to be picking up steam. Looking at this impressive growth, however, it’s easy to wonder whether the markets are becoming overvalued and a correction is in order.
In keeping with this concern, last Monday, December 5, marked the 20^th anniversary of Former Federal Reserve Chief Alan Greenspan’s famous warning about “irrational exuberance.”[4] Back in 1996, Greenspan worried that overvalued stocks and extreme investor enthusiasm could drive stocks to reach unsustainable levels. His warning didn’t slow the markets’ growth at the time, and several more years passed before the eventual dot-com crash.

So, are we facing the same irrational exuberance as in 1996?

Hardly. We’d argue that rather than being overvalued, the markets have yet to reach their fair price. Domestic fundamentals continue to provide positive data on the economy.  With a new presidential administration coming in 2017, we may see regulations lift and banks push more money into the economy, causing growth to accelerate.[5]
The markets’ recent growth seems to be based on rational exuberance. Investors see opportunities on the horizon, and they’re ready to grab them.

What’s ahead in this exuberant moment?

We’re happy to see new potential for growth, but we will continue to make choices based on detailed analysis rather than emotional reactions. This week, we’ll be paying close attention to the Federal Reserve’s December meeting, where the markets currently give a 95% chance that interest rates will increase.[6]
Remember that we are here to help you capture momentum that will support your long-term goals. We won’t take more risk than is appropriate for your needs and comfort. If you have questions about your priorities, portfolio, or plan, let’s talk.

ECONOMIC CALENDAR:

Tuesday: FOMC Meeting Begins, Import and Export Prices
Wednesday: FOMC Meeting Announcement, Fed Chair Press Conference at 2:30 p.m., Retail Sales
Friday: Housing Starts
 

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
“Use your gifts faithfully, and they shall be enlarged; practice what you know, and you shall attain to higher knowledge.”
– Matthew Arnold

Don’t Depend on Tax Refund Timing

The holiday shopping season is officially underway, and you may want to take advantage of great deals on expensive items. However, if you plan on making major purchases on credit this holiday season, don’t rely on having your tax refund in hand before your credit card bills arrive. Many factors can affect the timing of your tax refund, especially if you have a complex tax situation. Though the IRS issues most refunds within 21 days of receiving a return, extra reviews or requests for more documentation can delay this process.
For more information on preparing tax returns or shortening your refund time, please contact a qualified tax professional.
Tip courtesy of IRS.gov[8]

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Diversification does not guarantee profit nor is it guaranteed to protect assets.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia.
The S&P U.S. Investment Grade Corporate Bond Index contains U.S.- and foreign-issued investment-grade corporate bonds denominated in U.S. dollars.
The SPUSCIG launched on April 09, 2013. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns.
The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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[1] http://www.cnbc.com/2016/12/09/us-markets.html
[2] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1480654800&period2=1481259600&interval=1d&filter=history&frequency=1d
 
http://finance.yahoo.com/quote/%5EDJI/history?period1=1479445200&period2=1480050000&interval=1d&filter=history&frequency=1d
 
http://finance.yahoo.com/quote/%5EIXIC/history?period1=1480654800&period2=1481259600&interval=1d&filter=history&frequency=1d
 
[3] https://www.msci.com/end-of-day-data-search
[4] https://www.bloomberg.com/news/articles/2016-12-05/greenspan-s-irrational-exuberance-looks-entrenched-20-years-on
[5] https://www.ftportfolios.com/Commentary/EconomicResearch/2016/11/21/give-thanks-for-the-coming-boom
[6] http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
[7] http://www.realsimple.com/food-recipes/browse-all-recipes/penne-puttanesca
[8] http://www.irs.gov/uac/Newsroom/IRS-Offers-Tax-Tips-for-%E2%80%9CThe-Season-of-Giving%E2%80%9D
[9] http://www.aarp.org/health/conditions-treatments/info-03-2013/7-ways-to-prevent-arthritis-photos.html#slide5
[10] http://des.nh.gov/organization/divisions/water/wmb/coastal/trash/documents/marine_debris.pdf