Ready for the next market correction? Today’s drop rekindles questions of whether this bull market is finally over. To be sure, stocks are up over 7% in the first 4 months, extending the 8-year run from the 2009 low.
But the bull market run has resulted in some expensive prices. Regardless of whether one uses multiples relative to sales, book value, trailing earnings, or normalized earnings, stocks aren’t cheap. The Shiller P/E ratio, which compares stock prices to normalized earnings over a 10-year cycle, is at its third highest dating back to 1887. The top two instances were 1929 (before the Great Depression) and 1997 (during the Tech Bubble).
Is The Market Getting Ahead of Itself?
I recently attended an event at which General George W. Casey spoke to a crowd of emerging business, civic, and non-profit leaders. General Casey served as U.S. Army Chief of Staff and was Commanding General of the Multi-National Force in Iraq from 2004 through 2007. He described his experiences in the Middle East, and his words offered some key truths for us all.
In his remarks, he referenced the “vuca” world in which we live: volatile, uncertain, complex, and ambiguous. He then stated how important relationships are to the success of any objective in such a world, in his case, peace in Iraq.
The financial markets are now closed for the year and with all of the theatrics the verdict is in. Those investors with the following five characteristics prevail over those who fall victim to a host of mistakes and unsuccessful approaches:
- Investing from a superior position of financial strength.
- Being well prepared for a range of possible outcomes.
- Having an investment philosophy and approach you can confidently stick with and win with through thick and thin.
- Tuning out the noise, taming the emotion and focusing on what you can control.
- Investing for long-term success and, in the process, avoiding anxiety-toxic predictions, moves, comparisons, concentrations and traps.
Too much of a good thing can be wonderful, at least, if actress Mae West was right. But when it comes to your investments, we’d argue too much of a good thing can be downright
Consider what’s going on among blue chip stocks in today’s low yield environment. Anyone seeking income from bonds knows that yields are at historic lows. As such, many investors have sought blue chips stocks and their healthy dividends as an equivalent to traditional bonds. We don’t believe this to be a terrible idea, but it definitely comes with its tradeoffs and we question whether those risks and rewards are getting the attention they deserve today.
The last 18 months have been a volatile time in the market with fears of a Chinese recession causing a temporary market pullback in August 2015, Eurozone concerns causing a dip in February 2016, and Brexit triggering a quick decline at the end of June this year. Through all of that, the S&P 500 is actually up 3.67% over the last 12 months and 6.17% year-to-date. Because the S&P 500 is up 6%, your portfolio should have returned around 6% this year, right? Not necessarily, and if you’re in a diversified portfolio, likely not.
The problem with comparing a diversified portfolio to “the market” is that the S&P 500 only measures companies that make up a portion of a well-diversified portfolio. Football is top of mind as it is nearly football season again (HALLELUJAH!) so allow me to draw an analogy. Lineman, the largest players in football, make up only a portion of NFL football players. Comparing the S&P 500 to a diversified portfolio is like comparing the average size of an NFL lineman to the average size of an NFL football player. While players of the same sport are being compared, the comparison is apples to oranges because there are a large variety of statures in the NFL. The same goes for investing where there are countless asset classes available.
On Tuesday, Donald Trump won the Republican nomination for President. This news likely caused much elation, disgust, and nothing in between.
But among those who call themselves Republicans, this marks quite a shift in their thinking from last year. In an April 2015 poll of registered Republican voters, Jeb Bush led Marco Rubio while Donald Trump … wasn’t even on the list!
“What goes best with a cup of coffee? Another cup.”
Thus far, 2016 has been an interesting year for money managers. We have seen the recent market rally mask some of the greatest market volatility experienced in five years. If you think back to the beginning of the year, you’ll remember the worst start to the calendar year ever for the S&P 500. As recession fears subsided, stocks rebounded and we closed at a new record high on the S&P 500 yesterday. We have also seen a reversal in commodity prices.
From a total return standpoint, the S&P GSCI, the commodity index, sits atop of its equity counterparts. The increase in commodity prices have helped subdue the concerns of a global recession, but also comes with drawbacks. The clear drawback is the price to fill your car. We have seen prices at the pump increase over the year as oil prices have risen and now hover around $50 per barrel. Another downside, one not as publicized as other commodity prices, is the price of coffee.
Note: This Post will be updated by the author throughout the week ahead as developments unfold related to Brexit
Brexit: an example of creative destruction?
To understand the Brexit ‘Leave’ decision, you must understand one of the most powerful underlying forces shaping our world today: Creative Destruction. Understanding this concept can be the difference between tremendous investment success and failure in the years and decades ahead.
Creative Destruction, a term first coined by economist Joseph Schumpeter in 1942, is the continuous cycle of innovation and destruction behind all economic, business, and life cycles. This concept can be applied to businesses, careers, products…and yes…government organizations.
I have been a long time student of creative destruction and use it as a lens to view the world going through unprecedented levels of change. It’s a comprehensive way to assess perceived and real investment dangers and opportunities.
In business, when bright, creative employees sense they are in a “stagnation mode” organization, they naturally decide to leave the stagnant/status-oriented organization and are often attracted to a new up-and-coming organization that is gaining traction and growing (or promises to grow). Technically, this can leave the stagnant company with less creative talent which can accelerate the journey of the remaining company (theoretically full of bureaucratic, red-tape-type regulators) into a depletion mode. That company either rises to the occasion and reinvents itself or gets further entrenched into stagnation or depletion mode (see graphic).
As for Great Britain and Brexit, could this country be one of the confident/talented equivalents in the European Union (EU) choosing independence and seeking traction and growth on its own terms? I think there is a possible correlation. When someone (or some company/country, etc.) attempts the breakout, they are seeking to gain traction in the new environment and they very naturally can expect to get push-back from the stagnant/status forces that remain. Look for evidence of this in the weeks, maybe years ahead but don’t take it as gospel (it could be fear based PR targeted at undermining the change or it could be a genuine critique). For instance, when electric light was the breakout solution from gas light, gas companies attempted to advertise the threat of being electrocuted as a form of resistance against the breakout threat. The real test for a company, employee or government is: do they have enough gusto and intestinal fortitude to make it through resistance and gain traction with the new idea?
The tragedy in Orlando last Saturday has shaken the nation while rekindling policy debates on gun control, immigration, and terrorism. These issues are among many cited by the pessimists as
catalysts for the end of the bull market in stocks. But the odds are that they’re likely wrong, and here’s why.
The coming weeks bring us the Federal Reserve meeting on interest rates and Britain’s vote on exiting the European Union. And as my colleague Kyle Kersting recently noted, the U.S. presidential election adds regular headlines that jolt markets higher and lower. The problem, however, isn’t the actual risk any of these topics pose, but rather how we feel about such risks.