You can see the market wrestling with the problem in recent weeks. It clearly would like to move up, as the bounces from the tariff news show, but there simply isn’t enough conviction to push values above the previous high. Worse, each bounce is petering out at a lower level, and each drop takes us closer to the long-term trend line.
Confidence No Longer Growing
What has brought the market to where it is has not been just strong fundamentals but also confidence that things would keep getting better. While the fundamentals persist, confidence has kept the market high, but hasn’t been enough to force it higher. What seems to be happening now is that the fundamentals, as good as they are, have peaked in their ability to drive the market higher. Confidence, while still high, is also no longer increasing. And with each new risk? It just gets weaker.
The Big Picture
The base case remains solid, therefore, the market risks continue to increase. I took the risk level to yellow in the last Monthly Market Risk Update, based on quantitative reasons. But looking at the big picture since then just leaves me more concerned.
This is not a reason to panic—far from it. Market weakness is a long way from a bear market. As I noted, the big picture remains quite supportive. It is, however, a reason to reevaluate our portfolios and to think about the risks we have in them. The time to fix the roof is before it starts raining, and the clouds are starting to show up.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions.