Jim Niedelman:
It’s time for this week’s edition of 4 Your Money. We’re joined by John Nelson, a financial advisor with NelsonCorp Wealth Management. Great to see you, John.
John Nelson:
Good to see you, Jim. Thank you for having me.
Jim Niedelman:
It seems somewhat regular now that we keep coming back to the topic of frothiness, I guess, that we see in the financial markets. Can you give us an update on that or what your thoughts are about it?
John Nelson:
Yeah, it certainly has. We’ve seen a significant increase in this market cycle. And over the past number of visits, we’ve talked about the comparisons between this market cycle versus the late ’90s, early 2000 tech bubble. The tech companies have certainly led the way this go-round as they did before. I think some of the biggest differences that we’ve pointed out is the profitability of the companies today versus before. So what we saw before in the late ’90s was tech companies that had significant runs, but they weren’t necessarily profitable. Today, that’s very different when you’re seeing the largest of these companies posting 100 billion dollar plus quarterly revenue numbers. That certainly wasn’t the case before. So there is some cause for concern. The metrics that we look at, a number of things have softened up or have recently gone to maybe a little bit more concerning levels. No immediate cause for concern, these are timing tools, but certainly something that has caught our eye and that we’re watching very closely right now.
Jim Niedelman:
What kind of an example can you give us of something specific that you’re seeing in all of this?
John Nelson:
Yes. So what I brought with me today is a graph that maybe illustrates a relationship between recent cycles. So margin to debt balances is one of the biggest areas. And margin is specific type of loan that a broker loans to an investor. Now why an investor would do this would be if they wanted to buy more of something, leverage their current money, or if they had investments that they didn’t want to sell to free up the cash to then purchase a different investment. So the margin levels kind of, as you can see here, follow market cycles and both ups and downs. So you can see the first hump there in the late ’90s, early 2000, that was the dot-com bubble. Then later the financial crisis of ’08-’09.
John Nelson:
Now we’re at all-time record highs. This is almost a four-fold increase from the start of the market cycle in 2009. And we’re three standard deviations above normal levels, to put things in perspective. So we’re certainly at elevated levels when looking at the margin to debt balances and something… Again, this is just one metric, one indicator, but something we’re watching very closely in terms of where we’re at in the market cycle and possibly some softening in the equity markets.
Jim Niedelman:
That’s certainly is incredible to see, with that perspective in that graphic specifically. Let’s bring it home now to the people at home watching because they want to relate it to their own decisions. What does it mean for their investments?
John Nelson:
Sure. So I’d say no immediate cause for concern. This again is not a timing tool that all of a sudden the market falls apart. Things can stay at elevated levels for some time. But it is a good time to maybe reevaluate where you currently sit. We’ve been on a nice stretch here. If you’ve happened to benefit from that, this bull market long-term cycle, and you have some profits, maybe now is a time to evaluate taking some profits, trimming some of those positions, putting some cash in your pocket, or transitioning it to maybe a little bit more conservative type investments.
John Nelson:
Also, there’s tools that we use and many other stop-losses. So those can be put in play to limit downside exposure. If those were at broader levels before, it may make sense to tighten those down today and just put a little bit more of a safety net, a little bit tighter than they have been, just given where we are in this market cycle. So a lot of things to be concerned with. There’s certainly some things that are propelling the market with low interest rates and the Fed stance on things, at least for the next probably nine to 12 months, but just a few areas of concern that we’ve seen softening up in the last two to three months.
Jim Niedelman:
John Nelson, plenty to think about there. Thanks so much for your time.
John Nelson:
Thank you, Jim.
Jim Niedelman:
And if you missed any of this discussion, we have that available for you on OurQuadCities.com.