Managing NUA and Concentrated XOM Positions

Last week was marked by good and bad news.  The good news for equities was that the market continued to move higher and on August 23rd, became the longest bull market in history.  As if on cue, many headline writers used this event to publish “the end is near” articles that have been a staple of financial writers for the past three years.  Perhaps one reason why they are writing about managing money and not actually doing it.  However, these milestone events often provide a good framework to see whether there really is merit to the argument that this bull market is too long in the tooth and on its last legs.

If you were President Trump, the news was not so good as the dual convictions of Paul Manafort and Michael Cohen cast a dark cloud over the White House.  Interestingly, the market reaction to both events was the same – a shrug of the shoulders and a continued move higher, albeit with a bit more trepidation.

Economy

The big news was in Jackson Hole, as Federal Reserve Chairman Powell signaled the Fed has no intention to raise interest rates at a faster pace as employment and inflation data remain within their target range.  As long as the unemployment rate remains low, and inflation stable, we can expect gradual increases in the federal funds rate guiding to a 2% inflation objective over the foreseeable future.

Markets

As noted earlier, equites climbed throughout the week to exceed the previous high set in January for the S&P 500.  Notwithstanding the political news coming out of Washington, equities seemed to discount increasingly tough talk on trade tariffs with China.  Treasury yields fell, and the high yield market was virtually on vacation as there was very little movement in the new issue market.

Analysis – Is the Bull getting ready to roll over?

Given the milestone last week signaling the length of the current bull market, we thought we would present our view on how long this can continue.  We read an interesting analogy comparing the bull market to the vintage car market – in short, its not the years but the mileage.  With respect to the market engine, the fundamental issues like a strong economy and increased corporate earnings give rise to the “mileage” of this bull market.

However, fundamental and valuation issues aside, we would argue that this ‘bull market” is not almost 10 years old.  There have been periods over the past 10 years where significant underlying sectors of the equity market have been affected, without pushing the overall index into “bear market” status.  In 2011 and 2015, there were significant losses at the individual stock levels that were not reflected in the indices because of the disproportionate effect of the FAANG stocks.  For example, roughly 70% of issues were down more than 20% at one point in 2011 – in 2015 that number was 60%.  Why is this important?  This type of underlying “rolling bear market” through different stocks and sectors is like a reset button for the overall market health.  All stocks don’t move in tandem and the fact that there has been a wide divergence in performance underneath the index is a very healthy development.  It wouldn’t be out of bounds to say that the current bull market is in the early stages, if you look at the underlying corrections that have happened in individual stocks.

We would argue that this market has more room to run given the combination of previous corrective developments, strong economic fundamentals and earnings growth.   We have even seen this corrective action play out this year.  In January, the S&P made a new high that was 14% above the 200-day moving average.  The most recent high was made with the S&P only 5% above.  As the saying goes – “your mileage may vary” – we think that there is still gas in the tank of the current bull market.

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