How Delicate is the Economy and the Equity Market?

Richard St. John |

There is a growing concern that the slightest thing going wrong could turn the economy and halt the continuation of the bull market. As we look back at recent months, domestically we have seen 3 major hurricanes devastate Texas, Florida and the Caribbean, political unrest and dysfunction in Washington, and an NFL feud about the National Anthem with civil rights groups’ unrest. Add to this the Equifax data breach exposing millions of Americans to all kinds of fraud and the Fed indicating it remains on track to raise interest rates another 0.25% this year and begin the process of deleveraging its massive balance sheet. Recently we had the deadliest shooting in history in Las Vegas and a political battle involving the mayor of Puerto Rico. Internationally we have already seen North Korea successfully test a hydrogen bomb, threaten to explode another over the Pacific Ocean, and fire multiple missiles over Japan.  Spain is in a battle not to split and terrorist attacks in Europe are on the rise.

If the economy can absorb all that and the equity market can continue to hit new highs, what will it take to turn things negative, and what is propping it up? Earnings have played a big role in helping both the economy and the market. The job market is improving and wages are increasing. Oil prices remain low to help with transportation expenses. Holding the stock market up, company stock repurchase programs have continued to prop up stock prices as it increases demand while reducing supply.

While we understand major sector rallies always come to an end, often in ugly fashion, timing these reversals is extremely dangerous. To be out of the market because you fear it could collapse at any minute would have caused you to miss out on a great run. While Fear is not an investment strategy, we still cannot discount that any one thing could create a problem for the market. This is a major reason we believe a diversified portfolio with periodic rebalancing is one key to long-term success.