Sep 11, 2017 | Post by: Roman Chuyan, CFA Comments Off on More Upside For Stocks

More Upside For Stocks

Our domestic politics weighed on investor confidence last month. It looked as though politicians would use the debt ceiling as leverage in their fight over the budget, which would lead to a government shutdown. Investors were also concerned that North Korea’s aggressive show of force might trigger a U.S. military response. But those concerns were quickly lifted in the last week of August:

  • A game plan designed by Chief of Staff John Kelly was executed after North Korea fired its latest ballistic missile. This prompted a measured response crafted by the entire U.S. national security team. No more “fire and fury” tweets – whew!
  • The regime’s nuclear test last weekend was followed by the tightening of UN sanctions – another example of choosing deterrence by diplomacy.
  • President Trump reach a surprise agreement with Democrats to lift the debt ceiling until December as part of the bill to approve federal aid to hurricane victims.

So, it wasn’t a surprise that risk assets, including U.S. and global equities and high-yield, recovered the ground lost in August and proceeded to new highs.

But of course, what matters is what we forecast the market to do next – and that’s much harder. At Model Capital, our fundamentals-based process suggests that further upside is likely for U.S. equities, based on U.S. economic strength. Even though stocks market valuation remains high, economic factors are very positive, and improving.

For example, the gross domestic product – the broadest measure of economic growth – indicates that the U.S. economy remains healthy: Q2 GDP growth was revised up to 3%, and the estimate for Q3 is 3% (see chart). Even the statistics that deteriorated during the summer – consumer spending and housing starts – improved last month.

Model Capital Management - Q3 GDP forecast

After feeling very bearish in August, individual investors began to shift to a bullish stance, according to the American Association of Individual Investors. Sentiment tends to be a contrary indicator – negative sentiment is typically followed by above-average market returns when it reverses.

Model Capital Management - investor sentiment

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Disclosures: Roman Chuyan is the president and general partner of Model Capital Management LLC, a Registered Investment Adviser. This article is for informational purposes only. There are risks involved in investing, including loss of principal. Roman Chuyan makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Model Capital Management LLC. There is no guarantee that the goals of the strategies discussed in this article will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any security.

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