“Numbers never lie, after all; they simply tell different stories depending on the math of the...
Has the Market Peaked?
If you recall in our 2015 Outlook, published on January 31, Virtus Wealth Management expects 2015 to be the peak of the bull market. There are many reasons for this call and we know after a 7 year bull market we aren’t stepping too far onto a ledge. However, the purpose is never to be right nor is it to make some outlandish call hoping it proves to be correct so we can boast about it later. The purpose is to help people examine their portfolio to see if they are comfortable with the risk they are taking at any given point. We actually received another signal that might indicate that the top of the market is nearby. The signal came from the Misery Index. The Misery Index was created by Arthur Okun and is simply the unemployment rate plus the inflation rate. The higher the number, the more misery felt by the people.
It is a signal because in the past when it reaches certain levels it has been a leading indicator for stock market performance. If things are really good out there and both unemployment and inflation are low; as they are today, where does the improvement in earnings come from? Historical data shows it isn’t reasonable to expect both unemployment and inflation to stay low long-term, they have shown to be cyclical. Likewise, if unemployment is high and inflation is high, there is more room for improvement going forward.
Recently the Misery Index broke below 6, making 2015 one of only 6 years since 1965 to see the number that low. The other years are 1965-1966, 1998-1999, and 2006.
What is important here are not the years that the index broke below 6 but the 3 years after the period in which it did. For example, what was the performance of the stock market the three years after 1966, 1999, and 2006? Many of those years are burned into our memories forever as 2008 is still a vivid memory for investors and the tech boom and bust of the later 1990s and early 2000s was historic.
Not surprisingly the S&P 500 did not perform well during those years after we had a period of nirvana in the economy in which both unemployment was low and inflation was muted. The three years after the Misery Index was last recorded sub 6 in 1966 showed an annualized return of 1.1%, while the same period after the index was sub 6 in 1999 and 2006 provided a -3.1% and -1.3% annualized return, respectfully. Thus, the markets underperformed historical averages the three years after a period of low unemployment and low inflation when both together were sub 6, like we see today.
Is this an omen of things to come? This time could be different, but will it? From my perspective, the question isn’t “if it will happen” but instead “are you prepared in case it does?” As most of my clients know, we have taken precautionary steps to try to minimize the downside of their portfolios in case the markets do under perform. Let’s not have our own personal misery levels rise like the Misery Index, whenever it does start moving higher.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investing involves risk including loss of principal. No strategy assures success or protects against loss.