Market Commentary

The U.S. stock market reached new highs to close out 2017. The S&P 500 stock index was up over 21% last year and already another 6% in January before experiencing some decline in February. Given that the long term average return for the stock market is around 10%, future price appreciation is likely to be much lower. Not to mention that the market has not had a significant drop in almost a year and a half – far from the norm.

As our last commentary detailed, there are numerous indications that stocks are overpriced and vulnerable to substantial losses. The recent acceleration in prices seems increasingly to be the result of speculative fervor (i.e., gambling) rather than a reflection of sound investing principles.

As the accompanying chart demonstrates, corporate earnings are not much changed from 2014.

Asset Prices Not Driven By Earnings Growth

“Since 2014, the stock market has risen (capital appreciation only) by 35% while reported earnings growth has risen a whopping 2%. A 2% growth in earnings over the last 3 years hardly justifies a 33% premium over earnings.” – Doug Kass

The recent steepness of the market’s climb, on top of already high valuations, is reminiscent of previous investment bubbles. Nearly vertical increases in prices are almost always followed eventually by nearly vertical drops.

Speaking of investment bubbles, Bitcoin, the newly popular cryptocurrency, appears to be the latest example of “irrational exuberance.”


“It’s absolutely critical to distinguish the long-term effects of valuation from the shorter-term effects of speculative pressure. Historically-reliable valuation measures are remarkably useful in projecting long-term and full-cycle outcomes, but the behavior of the market over shorter segments of the market cycle is driven by the psychological inclination of investors toward speculation or risk-aversion.” – John Hussman, Hussman Funds

In other words, markets can become irrational (and very risky) in the short run but are ultimately rational in the long run. We are in one of those irrational periods and we continue to err on the side of caution with your investments.

Market Commentary

 In investment circles it is often said that “You make your money when you buy.” The basic notion is that the investor buys the stock of a good company that is temporarily selling at a low price and holds onto it until it can be sold at a much higher price.  So, to have a good chance to make a profit one needs low prices as a starting point.The problem is that seldom has there been such an absence of low prices. Not just in stocks but in bonds. Not just in the U.S. but overseas.

The major factors pushing investment prices skyward include:

  • Vastly increased borrowing by Central Government Banks around the world, which have used that money to buy up bonds (pushing up prices and pushing down interest rates) and even stocks (see chart)
  • Historically low interest rates have enabled corporations to borrow money cheaply and use it to buy back their own stock
  • An explosion in margin debt (investors borrowing money against their investments to buy more investments)
  • A large increase in index investing where new money coming in is invested in a basket of stocks regardless of the current price
  • Individual investors taking money out of money market funds and certificates of deposit and investing more aggressively in stocks in hopes of getting the returns they need

Based on the Shiller PE Ratio, which measures how the current stock market value compares to other periods of time, we now have the 2nd most expensive market over the last 100 years. Previously, when the market has been this high, the potential for positive returns has been greatly diminished. It’s hard to make money when you can’t “Buy low.”

“When the market has been in the 20% most expensive range (we are in the top 5% now) the average future return has only been 4.74% over the next three years. In contrast, the average maximum loss in that same timeframe has been -20.75%. That’s a lot of risk for minimal gain.”   – Erik Ristuben, Russell Investments

“When markets are priced for perfection as they currently are, it takes very little disappointment to lead to significant shifts in the price of assets.”   – Matt Kadnar & James Montier, GMO


At Journey Tree we ask ourselves not just what can we do to make money for clients but how can we minimize the potential for significant losses to their portfolios? Working to guard against large declines in account values is one of the most valuable things we do. Here’s why.

Incurring large losses means it becomes much more difficult to meet investor goals. The larger the loss the more challenging is it is just to get back to where you started.  For instance, if your account drops 20% your need to make a return of 25% just to get back to where you started.  (For example a $100,000 account would drop 20% to $80,000.  You would then need to get a 25% return on that $80,000 to just get back to $100,000.)

If your loss is 30% then you need to make a return of 43% just to get back to where you started. So you can see it gets harder and harder to get out of the hole you’re in when your losses are bigger. And it becomes even more problematic when you are withdrawing income from your account in a down market.  Not only has your account declined, but you are taking out money when it is low.

While the media reports on yet another record high for the stock market, we are focusing on risk management to help you through the inevitable rough times and opportunities that lie ahead.

Staff Updates


Having completed the annual visitations from family members, Jonathan and Sara are turning their sights to preparing for the imminent departure of Sam and Ingrid. By the end of August their household will have shrunk from four to two. Ingrid will take up residence in Bologna, Italy for four months to sharpen her Italian skills. In January she relocates to Toulouse, France to further hone her French. Later this month, Sam moves to the Los Angeles area to begin the Ph.D. program in geography at UCLA. Such great adventures ahead for them both! And Sara and Jonathan are looking forward to adventures of their own with their new-found freedom.


This has been a productive summer for Irina who is celebrating passing the Level I of the Chartered Financial Analyst (CFA) exam, which has been dubbed “the hardest test on Wall Street.” Next up for Irina is studying for the Investment Advisor Representative licensing exam, after which preparation for the Level II CFA exam (next June) will begin.



Jason is happy to report he passed the Investment Advisor Representative licensing exam earlier this summer, which allows him to make investment recommendations and enter trades for clients. He is even happier to report that he and his wife will welcome their first child – a daughter – into their lives in December. They are both excited to begin the adventures of parenthood, and they have been doing their best to enjoy their freedom while it lasts.

A Reminder About Requesting Withdrawals

In case you missed our last newsletter, we want to make sure you are aware of a new policy related to withdrawals from your accounts at TD Ameritrade. Due to an increased threat of electronic fraud, we are now required to obtain verbal authorization to initiate withdrawals from your accounts. You can still email the details of your instructions, but if you do so please also follow up with a phone call. You can confirm your request with any of us – Jonathan, Irina, or Jason – and if we are not available a voicemail confirmation is sufficient. We apologize for any inconvenience this extra step may cause and we appreciate your understanding as we continue to ensure the security of your accounts.

Is Now the Time to Refinance Your Mortgage?

With mortgage rates at or near all-time lows, many of you may have considered refinancing your mortgage. And if you haven’t considered it, we would strongly encourage you to do so. Of course, refinancing isn’t appropriate for everyone but there are often a number of benefits for many people, including:

  • Locking in a low interest rate
  • Reducing monthly payments
  • Freeing up cash flow to save for retirement, pay down high-interest debt, or fund hobbies
  • Cashing out some of the built-up equity to use for home renovations, investments, or other purposes

As with most financial decisions, there are a lot of details to consider when choosing the right course of action. We have helped many of our clients make the complicated choice of whether or not to refinance, and we would be happy to discuss with you whether it makes sense in your particular situation.