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Market Update: 8-21-17

TAKING A LITTLE RISK OFF THE TABLE

Burt White Chief Investment Officer, LPL Financial | Jeffrey Buchbinder, CFA Market Strategist, LPL Financial

We think it is a good time to consider taking a little risk off the table. Two weeks ago we wrote about how stocks are probably due for a pullback given their steady advance and some of the risks facing markets. This past week (August 16), we slightly reduced equity exposure in some of our model portfolios. By doing so, we acknowledged that those risks had begun to stack up during a seasonally weak period and that the trade-off between upside potential and downside risk, at least in the near term, had become a bit less favorable. This week we discuss some of the details behind that tactical decision and reiterate our positive longer-term view. Disclaimer: Today’s eclipse did not play a role in the tactical asset allocation decision discussed in this report.

WHAT WE DID AND WHY

As always, investors should consider their own individual risk tolerances and portfolio positioning. Here are some of the reasons we chose to slightly scale back our equity exposure and reduce risk in certain portfolios: ƒƒStocks have had a strong run. The S&P 500 Index’s 10% return year to date is ahead of our 2017 forecast (6–9%). Furthermore, despite Thursday’s declines, the S&P 500 and Dow Jones Industrials Average are both about 2% from their alltime closing highs (the Nasdaq is about 3% away from its all-time high). Although we continue to believe that valuations are supported by earnings growth, low interest rates, and low inflation, it is logical to expect pullbacks to be bigger when they start at higher valuations. The price-to-earnings ratio for the S&P 500, at just over 19 times consensus forward estimates (next 12 months, Thomson Reuters data), is at its highest level since the peak of the dotcom bubble in 1999...

Download the complete PDF with graphs here.

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