You cannot make this stuff up! Thus spake Mike Wilson, Morgan Stanley’s U.S. chief equity strategists. The “wrong kind of stocks” in Wilson’s mind are defensive … names like Pfizer, Merck and HCA. This is all happening while the faster growth leadership names like Amazon and Alphabet (GOOG) have been lagging. To Wilson this means that even though the market has broken out to new all-time highs in the S&P, that does not equate to an all-clear signal for stocks. Maybe you should be cautious!
My Reaction …
Thank you, Mr. Wilson, for laying another brick in that “wall of worry” that just will not seem to come down. For over a decade the Wall Street / CNBC media crowd has been providing cautionary advice to investors, big and small. For over a decade money has been coming out of equities and going into the bond market as investors continue to anticipate imminent market collapse.
Meanwhile, the earnings on the S&P 500 almost tripled between 2009 and 2018 ($56.86 to $143.34) and the dividend grew by 144% ($21.97 to $53.61).The actual index price has quadrupled and these guys have been warning you all the way up to be cautious, to be careful … that bad times were just around the corner. As you can see it continues.
Since the panic low of 666 in March of 2009 the S&P 500 index (excluding dividends) has compounded at over a 16% annual rate. This has been quite a run. Of course this return was generated off of a panic low. The market had hit an all-time high of 1550 in March of 2000. It may have briefly eclipsed that number in 2007. On a longer-term basis, looking back to 2000, the return has been much more paltry … only about 4% compounded (including dividends).
The above header is a link to a Forbes article from November of last year that talks about historical S&P 20 year rolling returns dating back to the 1970s. 4.5% (1998-2018) is not so hot as the range of these returns averaged, longer-term, between 4% and 8%. As such a possible reversion to the mean down the road would lead me to believe that we could be in for upside returns that might be very surprising to those advising CAUTION. This view is reinforced by the shunning of stocks and favoritism that bonds have been shown over the past ten years.
“According to data from the Investment Company Institute (ICI), domestic equity funds experienced outflows of $105.5 billion in 2018, $30 billion of which flowed out in the fourth quarter.”This continued in the first quarter of 2019.
” … Investors pulled $5.6 billion from stock funds in the first quarter (2019) while pouring $94.2 billion into fixed-income funds, according to Bank of America.”
Investors are so fearful that today they are willing to accept a 1.82% return on a 10-year U.S. treasury note rather than a near 2% return on the S&P 500. I remind you that the S&P dividend was up 144% in the last 10 years. That T-note you bought 10 years ago yielded 3.43% (vs 1.97% on The S&P) but the t-note yield did not grow, nor did its principal value.
Why should we love defensive leadership in the market?
We should love it because it signals fear and caution as the market moves into new all-time high territory. Fear and caution are never present at secular bull market tops.
What’s your take?
P.S. I am attaching a copy of an article from earlier this month that talks about the fact that for the first six months of 2019 investors poured money into money market funds at as strong a pace as they did during the financial crisis in 2008 (link). You know what the market did during the next decade!
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