3rd Quarter 2017 Market Commentary

The Dow Jones Industrial Average posted a gain of 4.9% during this past quarter. It was the eighth consecutive quarter with a gain. This is the first time this has happened in 20 years. During this eight quarter period, the Dow posted a gain of 37.6%. That compares to a gain of 65.9% for the eight quarter run in the mid-90s.

So what happens next? Will the surge continue? Will we have a minor setback or a bear market? What will the catalyst be for the next move? Of course, no one knows the answer to these questions but it makes sense to compare what we saw 1997 to where we are now.

Period                                                Eight Quarter                              Eight Quarter
Year                                                    Gain 1997                                     Gain 2017

DJIA Beginning of period             4,789.08                                        16,284.70
DJIA end of period                          7,945.30                                        22,405.09
% Gain                                                   65.9%                                             37.6%

So while the duration of the two rallies is equal, the gains that we saw in 1997 were much higher. An argument can be made that this current rally has much more to go given the comparison to 1997. Others might argue that what happened in 1997, 1998 and again in 2000 may tell us more. As a refresher, in 1997 we dealt with the Asian Contagion, in 1998 we endured the meltdown of hedge fund Long-Term Capital Management which was over-levered and then in 2000 we went through a 3 year bear market due to slower growth and high market valuations. Needless to say, it was not a fun time.

While we can’t predict if there will be another Asian Contagion or another Long-Term Capital type of catalytic event, we also don’t know if we will have another year 2000 bear market event. While our current stock market valuations are indeed stretched at about 18.4x forward earnings, keep in mind that we do have historically low interest rates, a pending tax cut and some decent growth. In contrast, the market traded at about 26.2x forward EPS at the beginning of 2000. So, we are nowhere near that level.
So that is a lot of data and a lot of comparison but perhaps the most important thing to gather from the data is not the 65.9% or the 37.6%. Nor is it the 8 consecutive quarters, or the events that followed. It’s the fact that the market is up nearly triple in the last 20 years. That is probably something that most readers missed – the Dow was at 7,945.30 twenty years ago and today it stands at 22,405.09. Considering that we endured the Asian Contagion, the Long-Term Capital event and a three year bear market from 2000 to 2003 and then a financial crisis in 2008; that is not a bad return.

We’ve said it 100 times…have a plan, have some goals, diversify and choose an allocation that gets you to where you need to be over the long term. In between we will have ups and downs, bear markets and bull markets and eight quarter bull runs and unpredictable short-term crashes. If history is any guidance, we should see the long-term growth that we have come to expect.

Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson, Bel Air and Columbia, Maryland.