Stocks
The stock market is in a topping phase as evidenced by extreme valuations and too much optimism. We find the typical large-capitalization stock is at record highs according to Price-to-Sales* ratios. Likewise, euphoria reigns. Investors Intelligence recently reported the highest level of net bullishness in decades.
The e-commerce area has seen explosive growth in the last five years. It rivals many previous bubbles, all of which saw significant downturns after their peak.
While economic conditions look favorable, we found 6 of the last 13 significant market corrections (over 15% declines) took place outside of a recessionary environment.
Tax cuts will affect stocks. Our research finds stock returns are usually stronger in the 12 months prior to the tax cut signing than in the following 12 months. However, the long-term impact is quite positive and we believe certain sectors of the market will especially be rewarded.
We do find some favorable factors. Stocks often move in long-term trends and the current one has been for higher prices. Also, corporate earnings are growing at a faster pace than their 5-year average.
Overall, risks of a significant correction are high. It would be prudent to take a more conservative approach to stocks until risk levels fall.
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Positives |
Negatives |
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Momentum remains strong |
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Valuations near extremes |
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Solid earnings growth |
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Too much optimism |
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Long-term benefit of lower taxes |
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Tax cuts initially disappointment |
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E-commerce mania |
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Disclosure
This information is of a general nature and does not constitute financial advice. It does not take into account your individual financial situation, objectives or needs, and should not be relied upon as a substitute for financial or other professional advice to assess, among other things, whether any such information is appropriate for you and/or applicable to your particular circumstances. In addition, this does not constitute an offer to sell, or the solicitation of an offer to buy, any financial product, service or program. The information contained herein is based on public information we believe to be reliable, but its accuracy is not guaranteed.
Investing involves risks, including loss of principal.
Past performance is no guarantee of future results.
ALPS Distributors, Inc. 1290 Broadway, Ste. 1100, Denver, CO 80203 (Member FINRA). ALPS is not affiliated with James Investment Research, Inc.
*Quantitative Tightening is a course of action undertaken by the Federal Reserve to constrict spending in an economy that is seen to be growing too quickly or to curb inflation when it is rising too fast. *Yield Curve Spread is a metric bond investors use when gauging the level of expense for a bond or group of bonds. *Price-to-Sales ratio is an indicator of the value placed on each dollar of a company's sales or revenue. *Cryptocurrency is a digital or virtual currency that uses cryptography for security.
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