Market Update
(all values as of 10.30.2020)

Stock Indices:

Dow Jones 26,501
S&P 500 3,269
Nasdaq 10,911

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.88%
10 Yr Municipal 0.94%
High Yield 5.72%

Commodity Prices:

Gold 1,878
Silver 23.72
Oil (WTI) 35.71

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.29
Yen / Dollar 104.44
Dollar / Canadian 0.75
 

Longevity of the Current Bull Market

The current bull market is approaching its 8th year anniversary making it the third longest in history.  Investors are looking for signs that would indicate whether we are closing in on a market top or if the rally can continue.  As a tactical investment manager, Shamrock is actively reviewing data to determine if a recession is looming and how we should position portfolios.  Recessions almost always are a result of one of the following:

All three of these indicators are not flashing warning signs causing the Investment Committee at Shamrock to look deeper for other indicators of market stress.  Many times market tops are revealed by the following indicators:

While the average retail investor has become more bullish, we are no where close to extreme levels witnessed before the tech wreck in 2000 and the housing crisis in 2007.  M&A actively increased in 2016 and ended up being the third most active year falling only behind 2015 and 2007.  2016 was one of the slowest years for IPOs since 2009.  Post the presidential election in 2016, we witnessed a shift from defensive sectors leading the market to more cyclical sectors showing the greatest growth potential.  While the increase in M&A activity concerns us, the other warning signs are not indicating that a major market correction is looming.

With no clear signs that a market top is imminent, we are watching the following signals that could sugest the bull market is nearing an end.

Interest Rate Levels

After raising the Federal Funds Rate by 25 basis points in December, the Fed has signaled that it expects three additional rate hikes in 2017.  With inflation on the rise and US GDP expanding in 2017, additional rate hikes are warranted.  Shamrock is confident that the US economy can sustain higher interest rates; however, if the Fed were to raise rates too high too quickly that could cause the yield curve to invert and would choke off growth and could lead to a recession.  Runaway inflation has the same negative impact on wealth as does declining asset prices, and therefore Shamrock is in agreement that the Fed should raise rates to prevent hyperinflation.

 

Credit Spreads

In terms of business cycles, widening credit spreads indicate a slowing economy. Since companies are more likely to default in a slowing economy, the credit risk related to their bonds rises. For this reason, investors command additional interest on corporate bonds.  Bond spreads tighten with improving economic conditions and widen with deteriorating economic conditions.  Spreads for both investment grade corporate bonds and high yield have narrowed considerably since the financial crisis and have remained tight with the exception of the period surrounding Brexit in 2016.  However, if spreads begin to widen, it may signal that growth and corporate profits are deteriorating, which could result in a rise in defaults.  This may be an early indicator that the bull market is nearing its end.

Current Market Volatility & Corrections

History has shown that late in bull market cycles, the stock market experiences a significant increase in volatility and an increase in the frequency of market corrections.  Shamrock’s tactical solutions decreased equity exposure in early 2016 due to the fact that we experienced two 10% plus corrections in a very short time (3rd quarter 2015 & 1st quarter 2016).  Beginning in March 2016, market volatility has been unseasonably low with the exception of the brief volatility spike  associated with Brexit in June 2016.  The CBOE VIX Index, a market estimate of future market volatility, remains below 12 compared to its long-term average of closer to 20.  Prolonged periods of benign volatility has almost exclusively been found in market uptrends.Source: Strategas. As of: 2-16-17

High volatility and market corrections are not flashing warning signs presently.  However, should we see a measurable pick up in market volatility or more frequent corrections, it may be a sign that the bull market has run its course.  The Investment Committee will monitor these signals to provide you with the peace of mind.