Dear Clients + Friends,
As the calendar turns to October and three-quarters of 2017 has
passed, we continue to see more all-time highs for the US stock
market. How long will the good times last? We never exactly know the
answer to that question. This is why the portfolios we suggest you
invest in have a wide range of investment products: small stocks, big
stocks, corporate bonds, US bonds, international stock, etc. When the
stock market is up (like it was in 2016 and has been so far in 2017),
our portfolios typically experience some, but not all, of the total
stock market gain. When the stock market falls, our portfolios
typically experience some, but not all, of the decrease.
Many investors believe the stock market is currently overvalued. That
may be the case, but we never know when the market will drop and
"correct" itself. Because of this, we encourage our investors to stay
the course. Enjoy the good times and be prepared for the bad. Designed
especially for our older investors, our less-aggressive portfolios
that consist of more bonds and dividend-paying stocks should perform
better than ultra-aggressive, high-growth stock portfolios in
down-market years. Usually, older investors need access to their
investments sooner than younger investors, so they invest more
conservatively. Younger investors are typically invested more
aggressively, and their portfolios may fall quite a bit in a "down
year." We want to remind our younger investors that most of you have
20-50 years before you will be using this money. We donít want people
to get discouraged by short term dips, or get too excited about
short-term growth. Think more about the steady long-term returns the
US stock market has been rewarding investors with for over 100 years.
What we have seen and what all the statistics show is people who
invest monthly regardless of market condition are the people who have
the most success with investing.
We hope you have enjoyed the strong performance of the markets for the
first nine months of 2017. We are here for you to answer any questions
or concerns you may have about your accounts today or in the future.
Please read our detailed outlook below, written by Fund Manager, Troy
Chris Bailey, CPA, IAR
Paul Sullivan, CPA, IAR
Sullivan Wealth Management | 240-800-4300 |
9000 Keystone Crossing
Indianapolis, IN 46240
click here to download this report in a PDF format
Dow 1 MILLION! (22,260 as of October 4, 2017) It must be so. Warren Buffet
says so. A closer look at this number means we will be earning about 4%
per year for the next 100 years, less than we have earned over the last
100 years. This kind of Euphoria gives us pause as people create a herd
mentality in the stock market. In the last quarterly newsletter, we spoke
of the market needing to pause. We have now seen the market continue to
move higher as both common investors and professionals seem to have
forgotten about risk. Are we that far removed from 2008-9 to not remember
the problems we faced? The chart below shows the spread between High Yield
(Junk) and the 10 yr Treasury. If you are good at looking at pictures, you
can see how investors have forgotten about risk as they are willing to buy
junk. JUNK Ė 10yr is near 3.5% The previous 1998 and 2007 lows were about
2.5%. We all know the result of 2000 and 2008.
This chart does not mean the market will fall down tomorrow. In fact, we
estimate we have another 12 months or more of the stock market running
higher before it pulls back. As often is the case, the last people to
arrive at the party get there but most of the food and drinks are gone. I
suspect barring a major geopolitical storm, the market moves another 20%
higher over the next 18-24 months before it significantly corrects. It is
possible the correction is light if the economy continues to shine and we
"melt up" to a higher market with greater earnings and greater wage growth
and lower unemployment.
We said last quarter there were many similarities between 2004-2006. The
chart above reiterates that point. In fact, had you purchased the S&P 500
at its then peak of earnings on October 9, 2007 at $84.92 and we told you
earnings for the next 10 years would grow at 2% ($104.02 S&P 500 12mo.
Trailing Earnings Per Share), you would not expect your return to have
been 7.3% Annualized. We doubt anyone would have taken the bet or invested
knowing a 2% earning growth was coming. However, the market has clearly
rolled forward from 18.4x P/E on 10/9/07 to a 24.5x P/E on 10/05/17. We
need earnings to catch up if we want to see the market move higher.
If earnings do not catch up and the Fed begins to unwind or sell off their
assets/balance sheet too aggressively, it could cause the market to lose
its liquidity and rates will rise too high, too fast. Often is the case
the Fed misses the market and moves one way or another too far until the
market tells them by moving too high or too low. We suspect this time will
be no different.
The seasonality chart we showed last quarter gives a good historical
perspective of the typical returns in any given month. It also shows how
the markets build momentum into the Holidays. As we approach year-end and
everyone looks to 2018, if the market continues to escalate, it would
probably mean we are in for a decent first half of 2018 barring any
Again, the Advance Decline line is showing us the market is continuing to
move higher as well. So we have some indications showing the market is
over baked, and some showing that signs of life still exist. Should the
Advance Decline line move negatively for a longer period of time, we may
see the market take a breather before moving higher. Ultimately, should
earnings continue to grow, the market should continue to move higher.
The final chart shows the S&P 500 with different valuation levels
(1965-2017). Very few times have we reached the peak level we are today.
The most significant time period is 1997 heading into the dot com bust. In
1997 and 1998 valuations were extremely overextended. In this market the
overextension is relegated to specific equities. One area is growth and
mega cap stocks, the other is bonds. The levels stocks have reached today
are similar to the 1998-99 time frame. If earning do not materialize much
higher, we may see a retracement in those stocks. However, there are
stocks undervalued in the market, most have higher dividends.
As we have stated in past issues, unless there are some geopolitical
storms on the horizon, the market feels quite comfortable at the levels
today. However, as most of you know, weather can change instantly and
without notice. The clear skies can roll in the thunder and lightning with
an hour and we could have a full monsoon or just some cloudy skies with
light rain. Barring any major problems out of the Middle East or North
Korea, I see the worst day as being hazy with some fog, but it will burn
off by mid day. Regardless of your political affiliation any major tax
policy out of Washington would be a win for the market long-term. There is
always risk that the rumor has pushed the market higher and the actual
news would result in a short-term sell off.
For the rest of 2017 and early 2018, we want to remind all our clients to
stay with a balanced portfolio. Although the bond market may be overvalued
it should provide some protection if the stock market finds a path lower.
However at this time we anticipate the stock market maintaining its
current level and not adding much in the way of higher appreciation and
the majority of the returns for the rest of this year will come from
dividends, buybacks, and return of capital to shareholders. It is possible
with an escalation of earnings, the market moves higher similarly to 2017.
The Archer Team
Troy C. Patton, CPA/ABV
Steven C. Demas
John W. Rosebrough, CFA
The opinions contained herein are not intended to be investment advice or
a solicitation to buy or sell any securities. Archer Investment
Corporation manages The Archer Funds. You should carefully consider the
investment objectives, potential risks, management fees, and charges and
expenses of the Fund before investing. The Fundís prospectus contains this
and other information about the Fund, and should be read carefully before
investing. You may obtain a current copy of the Fundís prospectus by
calling 800-800-1776 or visit
www.thearcherfunds.com. Past performance is
not a guarantee of future results. The investment return and principle
value of an investment in the Fund will fluctuate so that an investorís
shares, when redeemed, may be worth more or less than their original cost.
Distributed by Arbor Court Capital, LLC, 2000 Auburn Drive, Suite 300,
Beachwood, OH 44122 Member FINRA.
call our offices at 240-800-4300 if you have any questions
about these or any other accounting, tax, financial planning
or insurance related issues.
Chris Bailey, CPA, IAR
Ben Perron, CPA, IAR
Paul Sullivan, CPA, IAR
Sullivan Wealth Management