That is the state in which I perceive stock market fundamentals to be. Former client and friend, Wade Slome, Founder and Chief Investment Officer of Sidoxia Capital Management, put this in clear perspective in a recent investment letter.
Wade posits we need to reconnoiter …“given all the hypertension raising events transpiring in the financial markets during the third quarter. Although the large cap biased indexes (Dow Jones Industrials and S&P 500) were up modestly for the quarter (+1.3% and +0.6%, respectively), the small and mid-cap stock indexes underperformed significantly (-8.0% [IWM] and -4.2% [SPMIX], respectively). What’s more, all the daunting geopolitical headlines and uncertain macroeconomic data catapulted the Volatility Index (VIX – aka, “Fear Gauge”) higher by a whopping +40.0% over the same period.
- What caused all the recent heartburn? Pick your choice and/or combine the following:
- ISIS in Iraq
- Bombings in Syria
- End of Quantitative Easing (QE) – Impending Interest Rate Hikes
- Mid-Term Elections
- Hong Kong Protests
- Tax Inversions
- Security Hacks
- Rising U.S. Dollar
- PIMCO’s Bill Gross Departure
As I’ve pointed out on numerous occasions, there is never a shortage of issues to worry about, and contrary to what you see on TV, not everything is destruction and despair. In fact, as I’ve discussed before, corporate profits are at record levels, companies are sitting on trillions of dollars in cash, the employment picture is improving (albeit slowly), and companies are finally beginning to spend. (For more of the wit and wisdom of Wade Slome check out “investing Caffeine”).
As you can see from the list above, not much is new, save the ascendency of ISIS, Hong Kong unrest, and of course, the departure of Bill Gross from Pimco, cast by some as a potential bad omen for rates (it wasn’t. The 10-yr UST is trading at a 2.44% yield..several basis points lower than when Pimco announced Gross’s departure).
So, it is the ‘same ole, same ole’–suspended animation. The media continues to fret about a major correction and ignore or even feel good about a 5-year 200% advance in the S&P 500. Actually, this is one place where the media kinda gets it right. They just don’t know it. In a larger context these numbers are really not that great.. For example, since the peak in 2000 the S&P 500 (ex dividends) is up only 27%. Earnings and dividends on the index have more than doubled during the same period.
Clearly, you would have been better off invested in 10-year treasuries, yielding over 6% in 2000, than in large-cap stocks. The point I make is that this is well below the historical 6.8% long-term (1802-2006), compounded real rates of return for common stocks reported in Professor Jeremy Siegel’s work. Two percent is not much to celebrate. On the contrary, a return to that 6.8% average after this prolonged underperformance could provide considerable upside from here.
Yes, you should expect a bigger, better correction (BTW, the Russell 2000 just had a 10 percenter). It would be normal. Carry a comfortable (for your circumstance) cash position, and be a long-term investor in, what looks to me, like a continuing, secular bull market.
What do you think?
P.S. Good news is good news again … at least as of last Friday. The market, vis-a-vis good economic news, chose to suspend its fear of tightening Fed policy — in light of the good employment numbers and a drop in the unemployment rate below 6% — and roared higher on big volume.
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