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Index Month / Year to Date

Dow Jones +3.35%/+18.51%
S&P 500 +1.61%/+15.18%
NASDAQ +2.77%/+24.76%
10-yr Treasury was 2.34% at the end of September and 2.38% at the end of October

Source: marketwatch.com


It was another month of record highs for the stock market, whose laser focus on economic optimism continued to allow it to shrug off bad news and ominous headlines almost daily. A month that opened with lingering worries over North Korea and ended with another horrific terrorist attack in New York City also saw an escalation in the Russia investigation and more rifts between Trump and some Republican lawmakers.

Despite it all, Trump’s tax plan actually made some progress when the House of Representatives narrowly passed his budget proposal.1 As noted before, the record-high markets are almost dependent on the ability for the tax plan to pass and quickly bring economic growth up to levels high enough to justify overinflated stock values. (Never mind that many economic experts call the tax plan unviable and say it is likely to increase our enormous federal deficit.)

It’s worth noting that as the month ended, valuations reached what some are calling an “ominous level” based on a well-known market indicator. On Halloween, the Shiller CAPE ratio, which compares stock prices to their earnings over a 10-year period, was again at 31.43. That is roughly where it was when former Federal Reserve Chairman Alan Greenspan warned about “irrational exuberance” in December of 1996. And, according to Nobel Prize-winning economist Robert Shiller, himself, the only times valuations were higher were around the stock market crash and beginning of the Great Depression in 1929 and the dot-com boom in the late 1990s.2

The bottom line is that right now remains a good time for anyone who might be carrying too much market risk as they approach retirement to reduce their risk based on the most basic principle of investing: buy low, sell high. The markets are at record highs now, and although they could climb slightly higher still, there is also a good chance we could see an overdue third major market correction in the near future.

Keep in mind, too, that since the turn of the century, fixed-income investors have achieved an average return comparable to buy-and-hold investors, who’ve averaged roughly 5 percent with dividends factored in. By comparison, many income-based investors whose portfolios have been properly managed have achieved close to 5 percent income and greater than a 5 percent total return. Plus, they’ve done it with far less risk of a major loss during two major drops (2000 to 2002 and 2007 to 2009) and without the continued risk of a third major stock market drop.

1 Ashley Killough, “Budget narrowly passes house, a key step in tax reform,” CNN, last modified October 26, 2017

2 Jeff Cox, “The Stock Market’s Valuation is Back to the Point Where Greenspan Warned of ‘Irrational Exuberance,'” CNBC, last modified October 31, 2017

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