Saturday, January 6, 2018

After Dow 25,000, the Party Has to End. But When?

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S.& P. 500-stock index
Scale is logarithmic to show
comparable percentage changes
The six longest
bull markets
At over 3,000 days and counting, this bull market has been one of the longest on record, as the current eight-year run trails only the boom from 1987 to 2000.
In the midst of a long-running bull market that is now reaching momentous proportions, most investors may well have forgotten that just two years ago, during the first five trading days of 2016, the market dropped 6 percent. It was the worst five-day start to a year ever and supposedly a harbinger of bad times.
We know where that ended. Spurred by Donald Trump’s election that November, market indexes surged to record levels and went far higher this year. The Standard & Poor’s 500-stock index gained 19 percent in 2017, the Dow Jones industrial average rose 25 percent, and the technology-heavy Nasdaq composite leapt 28 percent.
There wasn’t a single day last year when the S.&P. 500 fluctuated more than 2 percent, a level of low volatility unseen since the mid-1960s, according to James Stack, a market historian and president of InvesTech Research.
In a rare convergence, investor euphoria spread across the globe. A measure of market performance, the MSCI All Country World Index, gained 22.7 percent last year, closing at a record high. And so far this year, stocks have continued their advance. On Thursday, the Dow broke the 25,000 barrier for the first time, and technology stocks are soaring to new highs. Cryptocurrencies like Bitcoin are adding a whiff of bubblelike mania.
And that may not be such good news for investors.
“If there are any certainties, one will be that this party will eventually come to an end,” Mr. Stack said. “A correction would be healthy. The longer we go without one, the greater the risk this will end badly. A lot of people will get hurt. And when it ends, it will end badly, and with high volatility.”
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That doesn’t mean the end is imminent, according to Mr. Stack and other investment managers and market experts I interviewed this week. All of them successfully navigated markets last year, when the greatest risk was being underinvested.
“Everybody thinks the market is overvalued,” said Jerome L. Dodson, the founder and president of Parnassus Investments. “So do I. I’m expecting a correction, but I was expecting one after Trump was elected. I was wrong. The market can keep going up even when it’s overvalued.”
Mr. Dodson didn’t move into cash last year, and his Parnassus Endeavor Fund, where he’s the portfolio manager, gained nearly 20 percent last year and is ranked by Morningstar as the No. 1 fund in its category (large-cap growth) over three-, five- and 10-year periods.

Stock Market’s Rise, Lauded by Trump, Lags the Gains Under Obama

President Trump has routinely celebrated, and taken credit for, the stock market’s record-setting climb during his first year in office.
“Most seasoned investors realize this market is overvalued and overbought and it’s been a long time since a normal correction,” Mr. Stack said. “They’re nervous.” Nonetheless, he said he was 82 percent invested in stocks, with 18 percent in cash, only slightly more than usual. He said he had learned from decades of market experience that “overvaluation isn’t what causes bear markets — it never has and never will.”
In addition, he said, “there’s going to be tremendous political pressure to keep the party going,” especially since Mr. Trump has so often cited the bull market as evidence of the success of his presidency.
So what should investors do?
It’s probably no surprise that Burton G. Malkiel, the renowned emeritus professor of economics at Princeton and author of the 1973 classic “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing,” recommends that investors “stay the course.”
“If the sharp rise in the stock market in 2017 has unbalanced your portfolio with a higher proportion of equities than is consistent with your risk tolerance, then you could do some rebalancing by trimming the equities down to the proportion at which you are comfortable,” Mr. Malkiel said. “But do not try to time the market. Nobody can consistently time the market, and those who try it usually fail.”
Although Mr. Malkiel is a longtime champion of passive, low-cost index investing, a strategy that has worked well since the financial crisis, last year he endorsed an “advanced indexing” approach at the automated investment manager Wealthfront, where he is chief investment adviser. Wealthfront aims to outperform strictly passive investing, and its taxable portfolio returned 20.56 percent last year, which indeed beat its benchmark.
Mr. Dodson is an active manager who focuses on stock selection. “I’ve never had a good record at market timing,” he said. “I look for stocks that are undervalued, but I’m having terrible trouble finding anything that’s reasonably priced.”
Technology stocks in general “are way overvalued,” he said. He has cut back on his fund’s large positions in Micron Technologies, Apple and Applied Materials after they notched big gains. With benefit of hindsight, he wouldn’t have sold them, “but someone once asked Bernard Baruch how he became so rich,” Mr. Dodson said. “‘I made my money by selling too soon,’” the famed financier replied.
Still, there are “a few” undervalued opportunities, Mr. Dodson said. He cited the health care sector: The biotech concern Gilead Sciences and the generic-drug maker Perrigo are two of his fund’s largest holdings. The toymaker Mattel “is on the bargain table,” he said. And even in technology, his fund has a large position in Qualcomm, currently fighting a takeover bid by the rival chip-maker Broadcom.
If so much is indeed overvalued, then this year’s market could well reward discerning active managers. “I worry about the index funds,” Mr. Dodson said. “They’re getting close to 25 percent in technology, given the high valuations and market caps. If there’s a reversal, it’s going to hit the index funds hard. This may finally be the year that active managers outperform.”
The New York Stock Exchange floor on the last day of 2017 trading. If there’s a reversal in 2018, said Jerome L. Dodson, the president of Parnassus Investments, “it’s going to hit the index funds hard.” CreditAndrew Kelly/Reuters
Mr. Stack agreed. “Active management isn’t about beating the market but about achieving market gains within a defined acceptance of risk,” he said. “There are selective opportunities, but you have to dig to find them. None are true bargains anymore.”
He recently bought shares in the diversified industrial manufacturer Ingersoll Rand and is moving his portfolio toward more defensive positions in consumer staples, energy and materials. “I’d rather be early with portfolio defenses and leave some profits on the table than go into a bear market fully exposed,” he said.
Mr. Stack said that in examining bull markets over the past 50 years, he had found that both the technology and energy sectors outperformed in the late stages of a bull market. He said investors “should have some portion of their portfolio in the materials sector, notably energy, which had been so out of favor” until mid-2017.
In my outlook column last year, Damien Courvalin, head of energy research for Goldman Sachs’s Global Investment Research commodities team, was uncannily accurate in forecasting that oil prices would recover in 2017 and stabilize at $55 to $60 per barrel. (West Texas intermediate crude oil futures ended the year at $60.42.) So I asked him what his team was predicting this year.
“From a total-return perspective, it’s quite compelling to be invested in commodities,” he said — even though he doesn’t see oil prices rising much above current levels by year’s end. That’s because, thanks to the shale oil revolution, producers outside the Organization of the Petroleum Exporting Countries can easily ramp up production when prices are $60 to $65. But commodities investors can still make a profit, he said, by betting on stable to rising prices in the futures market.
Like Mr. Stack, Mr. Courvalin noted that commodities and energy typically do well in the late stages of an economic expansion. Non-energy commodities may do even better, since they have no equivalent to shale and mining companies can’t increase production quickly in response to rising prices. In the mining sector, “margins are improving, orders are picking up, and we’re seeing new investment,” he said.
It may seem a paradox that investors’ worries about the coming year are mounting even as the economic outlook seems so bright. “Investors are struggling with this market because the skies are blue,” Mr. Stack said. “It’s rare when you have an investing climate like this one, where it’s all but impossible to find something to worry about, either domestically or globally.”
But that’s true in the late stages of most bull markets, he said, meaning investors need to be alert. And while virtually no one can foresee the next catalyst for a correction or bear market, even a hint that the Federal Reserve might raise interest rates more than expected would most likely set off seismic tremors.
“Most bull markets die by the sword of the Fed,” Mr. Stack said.

An Eyelash-Freezing ‘Icy Hell’

James Loughlin, of Austin, Tex., took a walk up the Mount Washington Auto Road at around 3,900 feet during a break in a SnowCoach tour in Gorham, N.H., on Friday. CreditLibby March for The New York Times
GORHAM, N.H. — The moment you step out into the frozen air on the way up Mount Washington — one of the most frigid spots in the lower 48 — the icy wind steals your breath and freezes your eyelashes. You can’t blink. The cold stabs your face and numbs your earlobes to rubber.
“It’s an icy hell,” said Amy Loughlin, 50, who was visiting from Austin, Tex., and scaling the mountain, the highest in the Northeast, in the back of a SnowCoach — a van retrofitted with tanklike treads to handle the blowing snow and treacherous roads.
With much of the Northeast and Midwest feeling like a block of ice, the temperature here in the high peaks of New Hampshire’s White Mountains was forecast to drop to 40 degrees below zero overnight Friday. The wind chill could make the air feel as cold as 100 below zero. That is not a typo. Negative. 100.
“We should end up being the coldest location tonight in the lower 48,” said Mike Carmon, senior meteorologist at the Mount Washington Observatory, who was one of a handful of scientists and others huddled at the top of one of the most dangerous and forbidding places in the country. “We basically just start saying it’s stupid cold outside.”
The temperature on Mount Washington had plunged to 26 below on Friday afternoon — 70 degrees below with wind chill factored in. The wind had gusted up to 122 miles per hour. Only specially outfitted vehicles are allowed on the road up the mountain at this time of year, and on Friday, snowdrifts and ferocious winds blocked even the SnowCoach from going farther.
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Derek Berg, 40, stood on the cliffs at Fort Williams Park in Cape Elizabeth, Me., on Friday.CreditTristan Spinski for The New York Times
It was only getting worse here and all across the Northeast in the wake of a “bomb cyclone” that turned Boston streets into an Arctic sea and left three-foot snowdrifts across New England. Weather forecasters were predicting temperature lows that could shatter century-old records in Worcester, Mass., Hartford and elsewhere.
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Millions of people from Florida to Maine were left shivering as schools closed and flights were canceled this week. Officials said that seven deaths appeared to be tied to the weather.
Windows splintered. Car batteries died. Along the Maine coastline, the flooding left icebergs in people’s yards. Ice fishermen had to keep their smelt bait close to them for fear it would freeze solid. Even snowmobiles coughed and sputtered and refused to start.
Across this American tundra, people called their heating-oil companies for emergency supplies and sat stranded on the sides of roads as tow-truck companies reported five-hour wait times to jump-start a dead battery or tow away a snowbound car. People slept in winter coats and debated whether wool, cotton or silk made for the best long underwear.
In Schenectady, N.Y., it got so cold and drafty that Chris Bendix, an engineering student, rigged up a “blanket cave” by raising a bed, hanging blankets from the side and sleeping inside the makeshift cave, snug against the baseboard heaters.
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Left: Susan Rauscher of South Portland, Me., and her two children, Maci, left, 9, and Anna, 11, braved the frigid temperatures at Fort Williams Park in Cape Elizabeth on Friday. Right: Dennis Fitts, 20, after surfing at Higgins Beach in Scarborough, Me. CreditTristan Spinski for The New York Times.
In Morrill, Me., Carrie Hall, 42, alternated between feeding applewood logs into her stove, shoveling snow and fortifying herself with sips of whiskey. And while recordkeepers were watching the thermometers as the temperatures fell, Ms. Hall had stopped paying attention.
“What does it matter?” she said. “It’s freezing no matter what the number says it is. It’s just awful.”
Atop Mount Washington, at 6,288 feet above sea level, there is no avoiding the cold. In fact, people here almost brag about it.
“We’re not necessarily the coldest in the country; we’re not necessarily the windiest — it’s the combination that we have of the winds and the temperatures and a lot of fog and a lot of snow,” Mr. Carmon said. That, he said, “is why we consider ourselves one of the most extreme places on earth.”
The meteorologists make hourly trips outside to check their instruments and measure the temperature, wind speed and precipitation. So they sheathe themselves in five layers and pull on ski masks and goggles. But the cold always finds a way to sneak in.
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Snow coaches at the base of Mount Washington in Gorham, N.H., on Friday. CreditLibby March for The New York Times
“It kind of feels like you’re stepping out into a pool of cold water,” Mr. Carmon said.
Even within a few minutes of standing outside at 3,900 feet — two-thirds of the way up — toes and fingers, including those wrapped in multiple layers of clothing, can quickly go numb. The wind turns snowflakes into projectiles that feel as if they are piercing any skin that is exposed.
It was enough to send Ms. Loughlin back into the SnowCoach while her husband, James, continued to brave the elements.
“Love you, mean it!” she shouted to him over the howling wind as she sought shelter.
Mr. Loughlin, whose face was unprotected, returned moments later, his face a stinging red and his eyelashes stuck together.
“I learned a valuable lesson out there,” he said. “Goggles.”
Just driving on the roads around here was an ordeal on Friday, as one young couple found out after they spent Thursday night in a nearby cabin. So much snow piled up so quickly that their car was trapped. They were left trying to shovel a path to the highway, as the snow blew horizontally around them.
Others viewed the weather as something to take advantage of. Surfers paddled into the breaks in Cape Elizabeth, Me.
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Left: Ms. Rauscher watched her children sled at Fort Williams Park. Right: Plunging temperatures and icy winds blasted Mount Washington and surrounding areas in northern New Hampshire.CreditLeft: Tristan Spinski for The New York Times; Right: Libby March for The New York Times
Tim Denoncour, 26, and Ian Hancock, 25, were preparing their skis at the base of Mount Washington to spend the day avalanche training. Both used to cold weather, they seemed relatively unfazed at the prospect of being on the mountain in the deep freeze.
Mr. Denoncour said he knows it is cold “when I can’t feel my face after five minutes.”
But as eye-popping as the wind chill and “real feel” temperatures may be, scientists say they are an imperfect way to measure the cold.
The concept of wind chill traces back to Antarctica, where two scientists, Paul Siple and Charles Passel, came up with a way of measuring how wind affects cold. Their simple experiment in the 1940s involved hanging plastic bottles of water in the wind to see how quickly they froze. From that, they extrapolated the relationship between cold and wind that suggests what it feels like outside, and the likely effect on exposed skin, that make for the highlight of so many winter weather forecasts.
But the use of wind chill as a way to measure cold is problematic — especially in places like Mount Washington, which is known for its extreme environment, said Greg Carbin, chief of the forecast operations branch for the National Weather Service’s Weather Prediction Center.
“A lot of people aren’t going to be exposed to the extreme wind,” he said. “Who’s going to be out walking in an 80-mile-per-hour wind?”
Still, he said this winter’s temperatures have been “very, very unusual.”
“Chicago has felt more like Bismarck, and New York City has felt more like Anchorage,” he said. “From Minnesota to Massachusetts, it’s been brutally cold over the last week, and it will continue into next week before we see a change,” he said.
But behind it, he predicted, would come relief. “The thaw is coming,” he said. “We just have to hold out for about another week.”