Is It Time To Get Nervous?

Two months and counting after the November election and it appears
that the recent market euphoria may be beginning to fade.

Expectations of a more robust pace of business activity are one thing,
but there’s a considerable lag time between the talk about changes
that may have a favorable impact on corporate profits and the reality
of when that might actually happen.

Consumer confidence has risen to the highest level since 2007, just
before the onset of the Great Recession. The good news is that the
banking system, after the extended turmoil of that time, is again
functioning quite well. Even so, part of the improved outlook is a
reflection of hopes for a pickup in the economy, which has been
marking time for an extended period.

Whether the hopes will be fulfilled is another story. Every year, Wall
Street analysts crank out their earnings estimates for the next 12
months. With rare exception, the numbers start on the optimistic side
and then get pared back over the course of the year. So here we are
again with yet another vote of confidence from the “pros”, but the
odds are that this year’s pattern of revisions will follow those of the
past.

At a minimum, this perspective will trigger the thought of reducing
one’s risk quotient while pondering the economic developments that
lie ahead. Although there are divergent views of where things stand
now, few make much sense.

Focusing primarily on the U.S. because international markets are still
roiled ignores the fact that U.S. valuations are stretched, not
ridiculously so, but enough to raise an eyebrow. The same goes for
concern about the impact of rising interest rates on fixed-income
securities. And so on. Investing in the U.S. market because other
opportunities are less compelling pays no attention to where
valuations are today.

This is one of the times when there is increasing reason to think
about staying on the sidelines while awaiting information that may
strengthen reasons for making or adding to commitments. What is
unwise is the belief that you should never take a breather.