Finding Investing Opportunities In A High Risk World.

According to President Trump, he is responsible for the stock market rally and the record highs that it has achieved (more here: https://www.bloomberg.com/news/articles/2017-11-06/trump-just-took-credit-for-the-stock-market-s-huge-rally-again).

Others might suggest that corporate earnings are responsible, although it may depend on how you look at those earnings and whether or not they are over-achieving or not.

We won't get drawn into a political debate (we remain politically agnostic) and we have our opinions on earnings and their expectations being more than built into current pricing. 

Current pricing is suggesting some 30% annual average earnings growth above the 10 year average over the course of the next year: 12 month forward looking Price to Earnings ratio is 18 times, the 10 year average is 14.1 times, which includes expected earnings growth of 10% over the net year). With economic growth of just above 2% (12 month moving average) as we discussed in last week's High Rock weekly video, we see this as a stretch. In other words, buying the S&P 500 ETF at this point in time would not be prudent as it is fraught with the risk that it may not meet investor's very high expectations. 

You may have to click on this (above chart) to enlarge it, but the message is clear, investors are being emotionally driven by the psychological biases that always appear in their behaviour.

That is a trap that we do not want to fall into.

That does not mean that we are not continually scouring markets for opportunities: When the C$ over-reached in late summer, we used that opportunity buy $US. When the Canadian equity market was the worst performing developed stock market, we decided to add to our holdings and when General Electric broke below $20 last week (down almost 40% from late 2016's highs), we put a little of our $US to work.

Everything we do is measured and relative to our return per unit of risk targets. 

When US equity markets get cheaper, we might add to our holdings of them. However, until that time, cash (or cash equivalent high interest savings funds) represent a tactically prudent alternative.

Meanwhile, both Canadian and US 2 year to 30 year yield spreads are narrowing, close to their lowest levels since 2007 / 2008:

Historically, when these curves flatten, a recession is not far behind. The US Federal Reserve is expected to raise interest rates in December and March, which would likely see this narrowing further (short rates higher).

Lots to concern us, so we need to be particularly careful (which is what our clients would expect us to do).