For those of us in the financial advice business, there is a never ending circulation of ideas that question the future outcome of our recommendations. It’s less so when the markets go up every day, but there are always uncertainties that surface.
Recently, the questions have been much louder than usual. There are a number of reasons for this, none of which are definitive, but collectively, persuade a growing number of clients to lose sleep and sometimes become frantic.
Most of us who have been in this business for years know that success comes from buying low and selling high. But from time to time, we succumb to pressures from our clients and from the various uncertainties and end up buying high and selling low. And the death spiral continues.
To provide a rational answer, or at least as rational as I am capable of, I offerred a blog post on August 5th which I titled “What’s Happening?”. It was a combination of my thoughts and those expressed by someone who writes a weekly blog about investments, a Jeffrey Dow Jones. ( Not sure who gave him that name but it works.)
Then later the same week, I happened to see a LinkedIn discussion from a group I belong to originated by Financial Advisor Magazine. The original discussion question focused on an article that appeared on http://www.businessinsider.com called The Stock Market Is Astoundingly Expensive And We Could Have A Historic Crash, written by a John Mauldin.
What really interested me was the discussion itself. All were comments from those who chose to participate, read the article by Mr. Mauldin and then offered their comments. For the record, I was among those who commented.
Few readers of this blog have access to LinkedIn discussion groups, at least not the ones I belong to. So I am taking the liberty of reproducing the trail of comments, as I think it will help my clients and perhaps other readers of this blog to better understand the dynamics of what they read and hear on TV, talk radio, and the media in general.
The principal takeaway I hope everyone understands is that if you and your advisors have developed a plan for what your money represents to you and your family over the rest of your life, and you are comfortable the plan was designed to grow and preserve your money, then you should somehow stick to the plan. Especially if built into the plan are safeguards for those unexpected and dramatic shifts in value that will happen from time to time.
Without permission from anyone, here is the discussion as it exists as of this writing:
Dick Power, CFP® • John Mauldin’s commentary is always thought-provoking and uses data to support his arguments. They are often compelling. Over time however, the predictors of bears are always right. I haven’t been reading his work for long, but can’t recall his ever pronouncing a positive trend as supportable. Like most commentators he has his perspective and uses the analysis to support it. He does so exceptionally well. I suspect there are other writers who could easily do the same and reach the exact opposite conclusion. I suspect the outcome is somewhere in the middle. IMO, without selective data and no fabulous charts to support it, a correction is likely as markets reach new highs. There is no logical cause for bliss, but there is lots of evidence pointing to modest improvement. We climb out of the Great Recession slowly as many have long predicted. But climb we do. The collapses in the stock market in 2000 and 2008 were predictable based on known bubbles. I don’t see one on the horizon that is driving current growth. There are conditions that would argue for corrections, but those are quite normal.
A wise investor will stay invested in a broad portfolio across sizes and styles and countries, even dabbling a bit in alternatives. The result will be an all-weather strategy that rides out the corrections easily and recovers from the collapses rather quickly. The “disaster” of 2008 impacted those investors for a year or less. I think we all know markets can do unexpected things and, try as we might, we cannot predict the future. John Mauldin can’t either. Could it be that we are so close to 2008 that those numbers seem altogether too real?
Jeff Vaughan • Even a broken clock is right twice a day.
Michael Botkin • Tic Toc Tic Toc
Jeff Vaughan • Dick Powers says it well.
Kenneth Nelson • We’ve been researching this issue this summer with Phd and Masters candidates from Duke, UNC, and NC State.
I’ve noticed several flaws in this article:
1. 2012 Operating earnings of the S+P 500 were 102.50. At 1700, the S+P is just under 17x earnings. That’s the median earnings multiple of the S+P 500 over the last 50 years. So, the market is not overvalued using trailing earnings.
2. The median forecast for 2013 S+P 500 are just north of 110, putting the market at 15.45 x EPS, just below the median operating P/E on the market for the last 125 years (using Shiller’s data back to 1880). So the market is not overvalued using expected earnings.
3. Behavorial Finance. Using the same Shiller data set, the market is clearly directional. At periods of median valuation it matters where you’ve come from. When we reach the mean from a period of low valuations, we overshoot to extremes. The reverse is also true. This issue was ignored in your article and contradicts your expectations.
4. The rate at which multiples expand and contract is also directional. This aspect of market valuation was hinted at, but the implication was that a rapid decline was imminent, when in fact the probability of multiple expansion is much more probable. Of course, eventually we’ll get a contraction, cross the mean and accelerate to new lows, but that happens on a regular basis… eventually…
We’ve been researching this issue with Phd candidates from Duke, UNC, and NC State and will publish our work this fall. Our research will discuss issues like how multiple expansions (and contractions) continue once they cross the mean, the magnitude of these expansion, the rates of multiple expansion and contraction and the implications given current valuations.
Back to our research. Ken Nelson
Dick Power, CFP® • Thanks for providing the data I lacked, Ken.
BARRY RABINOWITZ, MBA,CFP, EA • I agree: Nobody can predict the future. Despite all the facts and figures cited by the doom and gloomers and naesayers, the market continues to go higher.
If it were so easy, all the Phd economists with all their fancy software, would have made millions in the stock, bond and commodity markets, and would not still be working.
The same can be said for the so called market “gurus” and those writing market letters. I remember March, 2009, the market low, and these same economists and gurus were saying the market has to yield 6%, for a sustainable bottom. Guess what: They have been wrong for the past 8,000 points.
At some point we will have a market correction, or worse, a bear market, and like the boy crying wolf, they all will be saying: ” I told you so.” The question is when, and from what level? Dow 15,000, 16,000, 20,000???
Tony Kendzior CLU, ChFC • I want to compliment Kenneth Nelson for his rational response. I too, struggle to help clients better understand the forces at work and appreciate his articulation of the four points he makes. I’m looking forward to his published work on this. Crises such as what we experienced in 2008-2009 happen every 65-75 years or so. It’s likely there will be another when we reach 2070. In the meantime, I’m trying to help my clients grow their money and keep their sanity. Fearmongers are not helpful.
BARRY RABINOWITZ, MBA,CFP, EA • Fear sells. As long as not everyone is bullish, there are plenty of doom and gloomers, the market will be okay. Old Wall St Adage. “The markets climb a wall of worry.”
There are plenty of worries: higher interest rates, no budget deal, default on US debt, earnings not supported by revenue growth, etc….The key to long term success: Have a plan and stick to it.
Rob Anderson • JM has over a million subscribers to his weekly newsletter, Thoughts from the Frontline.
Evan C. Barrett, CFP®, ChFC • The bears have a wonderful habit of always being wrong, long term. As Barry said, fear sells books and garners TV ratings. Someone send Maudlin a Nick Murray book. Today the S&P hovers around 1700. 30 years ago the S&P 500 stood at 164. 30 years prior to that it was at 16. That’s a 10-fold growth rate every 30 years. Unless you believe the entire economic system of the world is going to completely collapse (I think NBC or ABC has a TV about such silliness) then one is forced to admit that long-term, markets rise. History may not predict the future, but it is the best instructor we have. Every setback has been temporary, and long-term growth marches forward. Timing the market is a fool’s game: there is a city in a desert in Nevada based on similar beliefs… go there and at least get free drinks while believing you have a “system.” Since the beginning of modern investing (let’s say 1926 or so), the smartest minds have formed the smartest teams and used the latest technology in an attempt to predict, beat, time the market. News flash: we still can’t do it consistantly, and that is because the markets are efficient. Ultimately, we invest in companies, not countries, and companies must find a way to make money or they go away. (If only governments were held to a similarly clear-cut measuring stick!) The S&P, at worst, is fairly priced, based on P/E ratios. You are entitled to your own beliefs, but not your own facts.
BARRY RABINOWITZ, MBA,CFP, EA • I agree with Evan. The facts are that it is time in the market, not market timing that ensures long term investment success. Although the S&P has returned over 8% per annum over the past 20 years, the average investor has earned less then 4%, less than 1/2 the market return, according to Dalbar Research. The reason: buying high and selling low.
The facts: $100,000 invested in S&P 500 in July, 2007, would have fallen to $45,000 in March 2009, but if you stayed the course, dividends reinvested, your balance today would be over $131,000, per Vanguard Research.
In order to earn equity type returns, you must be able to withstand the volatility of the equity markets, and stay invested for a typical market cycle, which is 5-7 years.
That is a worst case example, and I do not know anyone recommending 100% allocation to equities.
BARRY RABINOWITZ, MBA,CFP, EA • The SEC requires mutual funds to publish performance , 1 year, 5 year, 10 year, life of fund. How about the same requirement for so called market “gurus and seers.”
Joe Gordon • With all due respect, John is now in the newsletter advice business, Yield Shark, and sensational headlines sell newsletters. For $99/year, you can sign up and then throw tomatoes at him when he is wrong. Like all else, he will be wrong sometimes.
Riding the stock market QE wave, a great surfer must sense when to get off the wave before it crashes…the theme at this year’s SIC global macro summitt sponsored by John and Altegris. El Erian of Pimco used this analogy on May 1st so we know PIMCO went mostly out of stocks in MAY, and suffered the Tapering haircut on its bonds in mid-May to end of June.
Key takaway: David Rosenberg went more bullish than ever I can remember, and it mostly is becasue he is reading data and interpretting it. He said the 30 year bond secular bull was on its last leg….but, Lacy Hunt of Hoisington, former FED economist of the Dallas Fed, disagreed so it was a lively debate and thought provoking.