What’s wrong with this picture?
If our only focus is on Wall Street and a stock market that seems to know only one
direction, one might think that once again we’re in a Goldilocks era. Not too hot. Not too
cold. Just right.
The hitch is that there’s a lot more going on than what takes place during the midday
trading hours of each weekday. North Korea has just fired an intermediate range missile.
The Russians have deployed another cruise missile installation. An important California
dam is collapsing, forcing at least temporary evacuation of some 100,000 nearby
residents. And in the midst of this, the National Security Adviser has been forced to
resign after less than a month on the job. Who knows where all of this will lead?
Back in 1849, Alphonse Karr, editor of Le Figaro, said “the more things change, the
more they stay the same”. Over time, people tend to repeat behavior patterns,
which is why history is an essential part of educational curricula. So much of what we
are seeing now has already been done in perhaps a different fashion in the past. The
point is that there are developments and there are results of those developments.
All of which suggests that continuing market enthusiasm appears to be overdone.
We’re getting near the end of the seasonal market upswing. Add that to rich valuations
and it would be prudent to begin moving toward more safety in most portfolios.
Given the post-election gains of the U.S. market, investors would be well advised to dial
down the risk in their holdings on this side of the pond. Though some might argue that
higher valuations would be justified by the prospect of reduced tax rates, there are good
reasons to think otherwise. For one thing, the timing of such changes is anything but
certain. More important, however, is the fact that even if lower taxes increase net
income, there’s no impact at all on gross revenues or pretax earnings. Indeed, it would be
a stretch even to think that higher earnings might accelerate growth.
Better to be safe than sorry.