EQM Capital LLC – 3Q 2017 Market Commentary – The Hakuna Matata Market

Posted on Oct 2, 2017

Markets Continue to Rally

For those who have watched the Disney classic The Lion King, you know the Swahili phrase from the film’s song, “Hakuna matata,” which loosely translated means “no worries”. Nothing seems to worry this market, even though we are now in the longest bull market since WWII.

The third quarter of 2017 ended with most of the major stock market indices in record territory. The S&P 500 gained nearly 4% during the quarter, posting its eighth consecutive quarter of positive returns.  The tech-heavy NASDAQ closed the quarter up 5.8% for the quarter. Even small cap stocks, as measured by the Russell 2000 Index, which had been lagging, caught up during the quarter, also closing at a record high.

Nothing Worries This Market

There has been plenty to worry about: massive hurricanes, rising tensions in North Korea, lofty stock market valuations, and Washington DC’s inability to pass economic reforms. And yet markets remain in record high territory and the CBOE Volatility Index the VIX (a good gauge of investor fear) had its calmest quarter ever, averaging just 10.94 over the last 3 months.

Here’s an amazing chart demonstrating that this year’s maximum drawdown on the S&P Index is the smallest EVER.  Talk about Hakuna Matata!  Note the data goes back to 1914.  I digress here, but I always wonder what companies were even around back then, so I did some research. A few of the corporate giants of 1914 were: AT&T, United States Steel, American Tobacco, Pennsylvania Railroad, and three insurance companies, The Equitable, Mutual, and New York Life.  Henry Ford was just getting started.

Source: Michael Batnick, Ritholz Management

So why have investors been so calm in the face of seeming disaster? For one thing, the global economy appears to be in a synchronized recovery with most of the major countries well out of recession and even growing. The U.S. economy is also strong, fueling positive corporate earnings.  Despite concerns earlier in the year about the impact of rising interest rates and inflation, both remain benign. So the Goldilocks economy continues and it is expanding around the globe.  Emerging Markets have been particularly strong, thanks to a China-led recovery, with the MSCI Emerging Markets Index up more than 8% for the quarter.

Will It Last?

Will markets continue their rally in the fourth quarter and into next year? How much longer will this bull market last?

It appears on the surface that fundamental underpinnings are there for a sustained stock market rally:

  • good corporate earnings
  • positive economic growth here and abroad
  • business friendly reforms on the horizon
  • cash and bond yields remain so low that stocks are the only game in town

Still there are plenty of factors that could curb investor enthusiasm. Should the U.S. economy show signs of faltering, economic reforms continue to get pushed out, global growth slow or political tensions heighten, current market valuations could get a reality check, risk could be repriced, and we could see a pullback.

But for now, Hakuna Matata, no worries.


The opinions expressed above should not be construed as investment advice. This letter is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this letter should be interpreted to state or imply that past results are an indication of future performance.