As Good as it Gets

The S&P 500 has never gone a full calendar year without a month of negative returns since it’s inception in 1926. Through the first 10 months of this year, the S&P 500 hasn’t had a single month of negative returns. The index is already up for 12 consecutive months starting from last November.

Since the start of 2013, 18 of the past 19 quarters have been positive. Volatility has virtually disappeared. Bloomberg reported, “there has yet to be a 2 percent move up or down on the S&P 500. For a frame of reference, in 2009, there were 55 separate 2 percent up or down days and there were 35 in 2011.” There is now an entire new generation of naïve investors born, that believe markets can only go up.

This week Fidelity Investments released a new survey that shows that wealthy young millionaires have staggeringly high expectations for the coming year. Millionaires who are either millennials (roughly 20 to 36 years old) or Gen X (37 to 52) expect their investment portfolios to return 16.4% next year!!! (Fidelity’s 2017 Millionaire Outlook Study)

I’ve maintained a very positive view on the stock market, but this is not even close to my expectations.  This study is a sure sign that unrealistic market expectations are taking hold on this bull market. If a potential client met with me and expected a 16.4% return, I’d politely ask them to go visit another advisor that manages money based on past performance. I’m always hesitant to provide any future market return. Any financial advisor that promises a future return or even a past return, is most likely providing a misleading statement.

What is most important is not returns, but risk-adjusted returns. If a wealthy young millionaire wants to achieve a 16.4% return next year, they better be willing to lose their title of “young millionaire” and fall into the “once millionaire” category. When markets go up for 12 consecutive months and volatility drops to nothing, investment risk is no longer being considered. I would argue that this is the point when investment risk is the highest.

Other asset classes are also showing signs of extreme risk. Bitcoin, which I have written about often, is up another 40% in the past month. Over the past year, Bitcoin has leaped from around $778 to $6,000.

Many mortgage brokers and real estate agents have commented that home buying activity this October is higher than the spring season. They don’t know if it’s attributable to the warm weather or things are overheated.

We are entering the end of the year with investment risk nearing a very high level. The belief that politicians will pass tax reform, and a friendly business environment has placed a floor under the market. I remain positive on equity markets, but I’m not projecting anything close to a 16.4% return next year. I’m certain that this new generation of investors who believe markets only go up, will turn out to be very disappointed.

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