U.S. Equity Markets Up 8 Years In A Row?

Nothing endures but change. -Heraclitus

United States equity markets have increased eight years in a row. Risk averse investors look at history and would note the longest stretch of positive returns for the S&P ended in 1999-2000, when the market corrected by a huge amount (40% or so). Statistically, this kind of thinking falls into the fundamental trap called the gamblers fallacy, which essentially says each event is an independent event.

So, you have different ways of looking at the same situation and seeing outcomes which could be dramatically different. Given the long term investing context, 2016 proved to be a profitable year for equity investors as the Dow gained 13%, the S&P 10% and the NASDAQ trailed with a 8% rise.

Current valuations are a touch over historical levels as the S&P trades at 17x forward earnings of a projected $130 for the index. Relative to the rest of the world, it is a definite premium, but deservedly so, given the ability to generate profits and cash flow of these powerful companies. With interest rates at rock bottom levels, the financing environment remains excellent. Evidence of this is in the buoyant merger and acquisition market in 2016, the second highest on record.

Uncertainty remains on important topics like the ultimate outcome of corporate tax reform and other pro growth legislation, the recovery of the commodity complex and energy, and if the housing industry can rebound back to normal levels, among others. Nine years in a row looks like a formidable hurdle for continued gains, but one year at a time might be the more accurate way of looking at it.

The markets remained quiet last week with the lowest trading volumes of the year. Clearly, do no harm was the dominant theme of investors as taking some profit and being smart about tax losses were pervasive across the trading landscape. In specific company news, Kate Spade reportedly is looking to sell itself. The luxury sector has many strong companies which might be interested, including Coach, Ralph Lauren, Michael Kors, Burberry, PVH and probably others.

Burdened by the overcapacity of large big box retailers like Macy’s and Sears, large brand name manufacturers face downsizing in the wholesale area. Luxury is a segment with good margins and historically has provided solid returns. It is undergoing a change with increased competition and challenges in overseas markets. It is not hard to imagine consolidation taking place, and Kate would be a good start.

In complete contrast to what transpired in the markets, outgoing US President Barack Obama continued with his project of doing everything in his considerable power to create obstacles for the incoming administration. It was to be expected as we should have expected nothing less. Mr. Trump will take office in three weeks and part of his challenge is to systematically undo and overcome the various impediments Obama created for him.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.