Just like the masses that arrive in Vegas daily hoping to win quick and leave before the odds catch up with them, today’s market speculators are playing a losing game. Speculators’ appetite for risk seems insatiable and in contrast to current economic and political conditions. The stock markets have hit new highs and money is flowing into increasingly risky investments. The billion dollar question is whether this speculation will be justified or will end badly.

It is the nature of the market (investors & speculators) to extrapolate both the good times and the bad times into the future. Twice in just the past six years the general public has been dead wrong and paid a dear price. They expected markets to continue to rise in early 2000 and to continue falling in late 2002. The current environment is closer to 1996-1997 where the market was slightly over priced but continued to rise for several more years. From here, if the stock market rises too fast relative to corporate earnings growth (as it did from 1997 to 2000), then it will again end badly. However, if it rises more in line with future earnings growth, then all will be well.

At this point, we do not believe this will end like the market crash of 2000-2002 when the S&P 500 was down almost 50%. Currently, we still see some upside in the U.S. stock market, however, many are clearly betting on the past winners and fail to see the changes ahead. This is as dangerous as driving looking only in your rearview mirror. Housing, energy, value stocks, and junk bonds are yesterday’s winners.

Going forward the U.S. economy faces a prolonged period of slower growth. Such an environment requires a different type of portfolio than has worked over the past 4 years. We contemplate several adjustments over the next few quarters to minimize risks and continue to find opportunities for good returns.

The environment where good economic conditions excessively rewarded risk taking is over.