August was a good month for investors in the U.S. Stocks, both large and small, were up nicely and U.S. bonds were up modestly. The S&P 500, Russell 2000, and Nasdaq all traded to new all-time highs. Outside the U.S., the return environment was not as good, as most markets struggled and were negative on the month.
Many investors may be wondering, with all the trade war rhetoric and political theater, why the market is continuing to reach new highs. Our opinion on these matters is that the economy is performing well and the effects of trade disputes are relatively contained. As it relates to the political theater, the market is largely looking through a worst-case scenario, an impeachment proceeding, because investors would generally like Mike Pence’s economic policies.
With the market reaching new all-time highs, it is reasonable to ask how much longer this can go on. Throughout its history, the U.S. stock market has achieved new highs many times, and new highs don’t end bull markets. Even in bubbles, valuation isn’t what pops the bubble, but it is what matters after the fact. Bull markets are brought down by excesses, which are born out of complacency. Looking around today, the valuations seem full but fair if the economy is growing. While there may be pockets of excess, there are almost always some; on the whole it is hard to see clear excesses in the broader market.