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Goldilocks for Thanksgiving

As the US sits down to enjoy a long week-end filled with turkey, stuffing and sweet potatoes, we take this opportunity to sit back and review the market’s performance. Barely a day goes by without Wall Street hitting a new record high. The market has kept marching upwards despite all the headlines about the rise of the far right in Europe (remember?), a North Korean nuclear threat, and natural disasters like hurricanes.

One indication why the market keeps rising can be found in the latest poll of global fund managers by Bank of America Merrill Lynch. For the past six years, most managers had taken the view that both inflation and growth would be below trend. Today, however, almost half of all the managers expect above-trend growth and below-trend inflation, what is dubbed the Goldilocks economy (she wanted porridge that was not too hot, or too cold, but just right). That is the highest proportion recorded in the history of the survey.

A net 41% of those managers think global growth will strengthen over the next 12 months. Putting their money behind those beliefs, a net 45% are overweight - have a higher holding than usual - in equities. A remarkable 85% of managers think bond markets are overvalued, another record. While there was talk of a "Trump bump" earlier this year, belief in fiscal stimulus is not the main reason for the optimism; just over two-thirds of the managers polled think there will be some tax reform in 2018 but that the shift will have little impact on risk assets.

If we move closer to home, chances are your portfolio is not the only asset you own that has appreciated in value. Depending on where you live, the price of your home has also probably gone up. Standard & Poor's recently released the latest figures for the S&P CoreLogic Case-Shiller National Home Price Index. Nationwide, domestic real estate posted a 6.1% year-over-year gain as of the end of August. Most other regions in the world have seen similar rises in home prices.

US home prices are rising faster than inflation and wage growth, at least partially because of mortgage rates that are still extremely low. Home prices will not rise forever. Measures of affordability are beginning to slide, indicating that the pool of buyers is shrinking. The Federal Reserve is pushing short-term interest rates upward and mortgage rates are likely to follow over time, removing a key factor supporting rising home prices. Interestingly, as short-term rates have risen slightly, so far, long-term rates have not budged.

At some point, rates will rise too much, or the economy will slow, or one of the geopolitical risks will blow up (literally or metaphorically). Until one of those three bears appear, investors will trust in Goldilocks.

What lessons do we draw for our investments?

For now, the market is roaring. It is a good time to be invested in stocks. Even as stocks' winning streak continues, it is a great time to be buying stocks, too. We do not know when the streak will end, so it pays to keep regularly investing — all through the market's current rise and continuing through the inevitable dip, when we will be all too happy to buy shares of our favorite companies on the cheap. For now, enjoy the turkey roast, the stuffing and the sweet potatoes. Happy Thanksgiving!

Zurich, November 23rd, 2017

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