Monday, August 28, 2023

Stocks are doing great. After a disastrous 2022, this year has been basically the opposite. However, I’m going to give you three reasons it may be time to moderate your market optimism.

In my opinion, I think it’s safe to say at this point U.S. equities have generally exceeded most investors’ initial outlooks. While calls for a 2023 recession were loud, the stock market and economy have defied those expectations so far. But three things beyond any single person’s control could derail the progress.

First, U.S. household wealth can’t grow faster than gross domestic product (GDP) indefinitely. Yet, that’s what it’s been doing for years. Balancing it out would require either a sharp stock market decline or an extended period of much lower returns.

Next, international trade drives global growth, but it’s stalling for various reasons. New trade relationships will be established eventually. Until then, we’ll see reduced economic growth and lower profits.

Lastly, many older folks are repositioning their portfolios from equities to bonds. For years bond returns were low and it forced retirees into equities. That’s no longer the case. Fixed income is back. As a result, investors have a lot of catching up to do in switching from equities to bonds. Given the wealth-to-GDP imbalance, that could be an issue.

Overall, markets seem a bit frothy right now. Stocks have outperformed, and many equities are at or near all-time highs. It may be time to consider taking some chips off the table.