Poor Man’s Market Assessment – Aug 2018

It’s really hard to predict or time the market. That said, we can do a decent job of describing the environment we find ourselves in today, and that alone can be quite instructive as to what stance we should take in the markets. To describe the current environment, I update my Poor Man’s Guide to Market Assessment every ~3 months. Below is the August 2018 edition.

If I could summarize things, it would be that the US economy continues to fire on all cylinders, money is plentiful, and investors are chasing deals. That, alongside all the other metrics suggest caution is definitely warranted. I would agree. Move forward with caution. This is no time to go selling assets or making major allocation changes. Stay the course, but invest with discipline, and consider what amount of dry powder you need on hand to feel comfortable in the event of a downturn.

That said, it feels like everyone is predicting a recession in the next couple of years, which might be an argument for why we won’t have one…? If there is a recession in the next 12-24 months, it will be among one of the most anticipated recessions in my experience. A bull market climbs a wall of worry, and we have no shortage of ‘worrying’ right now, so perhaps this bull has legs?

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Below is the summary assessment over time. Notice that almost all indicators are advising caution. The most interesting areas are where things have changed one way or another since May 2018:

  1. Economy – admittedly, it seems like the economy has gotten even stronger since May (which is ironically a signal to be more cautious). Unemployment continues to drop, GDP growth clocked in at a very high pace in Q2 (>4%?). This perhaps comes as no surprise given the massive tax stimulus, but the real question will be what happens when we lose the tailwind of the tax gains?
  2. Outlook – personally, my outlook has moderated a little to neutral, for many of the reasons described above regarding the economy. Many are predicting that 2020 will be the year when the slowing impact of tax stimulus catches up with corporate growth and earnings
  3. Lenders, capitals markets, Capital, Terms, Spreads – all of these are red and advising caution. Cash is plentiful, and chasing deals. Investors are accepting looser, less investor-friendly terms
  4. Interest rates – it’s worth noting that the gradual interest rate increases. They haven’t taken the steam out of things yet, but we are seeing a slowdown in existing home sales (see Redfin announcement) likely in part driven by this rising interest rate environment – I suppose that’s a good thing to calm down the speculation and price growth to some degree
  5. Funds – it seems that GPs are getting overconfident and turning away excess capital

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