I remember the 1998 Russian crisis well. It was near the end of the summer, and threatened to put a real damper on an otherwise excellent stock market year. The “Moscow meltdown” bled over the S&P 500, which plunged 20%.
There are reasons 1998 and today are different
Tough sanction in place have somewhat isolated Western investors
Russia has a war chest of $416 billion in currency reserves today, versus very little in 1998
Russia’s currency is free floating, and not pegged to the US Dollar like in 1998. External shocks can be absorbed by the currency markets.
There are other worries in the world we can be concerned about, but Russia collapsing and spilling over to us like 1998 isn’t one of them.
I’ve mentioned all year long that I’m bullish and optimistic for the foreseeable future, and until data tells me something else, that’s where I remain.
However, what would change my opinion? What are the data that I look at, and how would they need to change in order for my opinion to change?
Good question, and one I address in this issue’s video:
Hi there, Mike Brady with Generosity Wealth Management, a comprehensive full-service wealth management firm headquartered right here in Boulder, Colorado.
The main topic for today’s video is that I am optimistic. I am very bullish and have been all year and will be until data changes. I think probably for at least another year as I look out. But what would cause me to go from bullish to bearish or pessimistic? I want to talk about that here today but first I want to address what happened in the market the last three or four days. It has been very volatile and more on the down side than on the up side. In my opinion this is one of those normal events that happen within the year. The last time we saw this was in September and October. I did a video for you in the middle of October and I said the fundamentals hadn’t changed. This is one of those steps back that we have to be accustomed to as investors and in an intra-year decline that does happen but the underlying stretch and the fundamentals hadn’t changed and that proved itself through the end of October, November, the first part of December. I am saying that here today even though the market has gone down in general over the last week or so. Am I panicked whatsoever? Absolutely not.
Let’s talk about bullish to bearish. One thing that I am going to look for and that I watch very closely is the PE ratio starting to go above 20. Once it hits 20 and above that is going to be one of my indicators to start to be concerned. I want to say that none of these – and I’m going to talk about those five – are standalone. I am going to address the very last one but my variables in this long equation are different than somebody else’s who also could be equally smart. It is just that this is what I am going to look for and I am going to talk with you about. In general I believe in the fundamentals. I’m a value investor more than I am a technical investor. A technical person would sit here and talk about what the graph looks like and use terms like “head and shoulders” and “double tops” and all types of patterns within the graph of the market. I am not going to do that here. That is not what I believe long term is going to be more successful for clients.
I look at the fundamentals of the economy and the impact that it is going to have on the actual stock market. The economy of a country can do poorly but if the stock market was underpriced it can actually still do well and vice versa. If the economy is doing really well and if the market was just overpriced then it either will stay stagnant or go down in order to get in sync again with that particular economy.
I’ve already said the PE ratio is one thing that I am going to look at once it gets closer to 20. It is now at 16.1.
Earnings per share drop – that is something that I am going to watch out very closely. Right now it is very strong but once it starts declining, I think that is going to be a long term signal that we are headed for some trouble.
The yields of a 10-year treasury. A 10-year treasury right now is 2.09 as of the date that I am recording this. It has frankly been all over the place. Incredible volatility in the last year or so. It has been as high as about 3% and this is actually the lowest that it has been in a very, very long time. A year and a half or something like that, maybe two years.
The fourth thing I’m going to look for is declining investment spending as a percentage of the GDP. There is a great number and a great graph that I watch and as we are watching a declining of a company’s investing and their investment spending that means that they are concerned about their own market, their own change, and their own profitability that I think is going to be a very bad sign which is going to be a leading indicator of lower earnings per share in the future.
The last thing that I am watching very close is China. China is the world’s largest market at this point. It has surpassed the U.S. economy and whereas we get a cold and the world gets sick, well China now is a huge partner in that as well that when they get sick. When their really strong, unbelievable economy starts to slow down that is going to really have a major ripple effect. There is a statistic I heard over the weekend that with all of their building in the last three years, they’ve used more concrete than the United States did in 100 years. They’re incredible. There’s so many. There are three times the number of people that we have. More than three times, three and a half times and just an incredible country and it is something that I am watching very, very closely. That being said, if there are any questions about what I’ve said here today, I will continue to look forward on these things as the years go by but these are what I think are very important. If you have a different point of view, hey, I am open to it. Give me a call and we can have a great conversation.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day. Thanks. Bye, bye.
Falling oil prices and collapsing exchange rates do not mean that it’s 1998 again.
There’s an old adage that “economists have predicted 17 of the last 3 recessions”.
History is an outline, a guide, but there’s a reason we disclaim “past performance is no guarantee of future results”. It should be modified to say “past history does not mean it will repeat itself here again”.
As volatility has increased in the past 3 weeks, I want to keep you well informed of my thoughts.
Are the past weeks normal, have the fundamentals changed, or is this the canary in the coal mine we’ve been waiting for?
These questions are answered in my video.
Hi, Mike Brady here with Generosity Wealth Management, a comprehensive, full service wealth management firm, headquartered right here in Boulder, Colorado.
I last spoke to you a couple of weeks ago and at that time, I talked about the third quarter. I said it’s been a tough quarter, very volatile and it was down. We’ve taken some steps back as it relates to the unmanaged stock market indexes. So far this quarter in the last couple of weeks, that has continued on the downside. Nobody ever minds volatility on the upside. One thing that’s interesting is over the last 25 years the daily average of volatility has been 0.77%, about eight-tenths of 1% on a daily basis. So far this year for the first half of this year, it was a half of 1%. It was kind of the average volatility on a daily basis. One of the reasons why the last two to three weeks seems so alarming is because the volatility has been over 1% so it’s two to three times what we’ve been kind of lulled into feeling the first half of this year and also what is normal when we look back over a 25-year timeframe. Two weeks ago, I mentioned that the smart money looks at the data and what’s happening now and says okay, so how far out an outlier is this? Is this something that actually happens quite often or periodically and that it’s a part of the game investing, part of what we should expect or is this is a precursor to something much more deadly? Are the fundamentals telling us that this is an early canary in the coal mine of some bad that’s going to happen? My answer is the first, not the latter, in that this is actually normal even if it is painful, a part of the process. When we look at a longer time horizon which is what sort of the smart money should do is looking at it from where does this fit in one year, five year, 10 year and even longer than that.
I’m going to throw up on the graph there up on your screen there, looking back over a 17-year time horizon for the S&P 500 which is an unmanaged stock market index and this is as of September 30. I’m going to put a little red mark where we are right now just to give it some perspective. I’m doing this Tuesday night so I know exactly what our closing number was and hopefully you’re getting this on Wednesday or Thursday. You can kind of see that in the whole scheme of things we could have said at that other line that I just put in there, yeah, you can see it’s a pop. It’s not going to go any higher and then we could have done it all the way from that bottom arrow all the way to where we are today. We could have said, oh my gosh, this is a high, it can never go any higher.
I’m going to put on the screen now a second graph which is looking back 114 years. You can see that there are consolidation periods and then there are times of advance, consolidation periods of times of advance. You can see there and I’ve just circled it where I believe that we are. I actually believe that we are on a longer-term advanced than we are in consolidation or a decline. Other people can make an argument to the downside; that’s okay. We always joke that economists have predicted 17 of the last the last three recessions so that’s an easy thing to do. The hard thing is for me to try to be as straightforward with you and say this is a part of that long-term process. As a matter of fact, our emotions have a tendency want to react in the wrong way. I’m going to throw a chart up on the screen there. You can see that in the late 90s, consumer confidence was at an absolute high, but that was the worst time to buy. Okay? Now you’re going to see back in the beginning of ’09 which was the beginning of that huge upswing that I showed you in the first graph that consumer confidence was a low. Then two years ago right before last year’s really strong stock market gain, consumer confidence was once again at a low. It’s almost contrary of what you would think. Like oh, people are feeling all negative so the market must go down negative. No, it’s quite the opposite. In fact, kind of what we call a lagging indicator where people actually do the wrong thing at the wrong time.
The next graph that I want to show you is up on that screen there. I think this absolutely essential. What you are going to see is those red numbers at the bottom are the intra-year decline. What that means is if the market was up 10% and then it drops 7% and at the end of the year at 3% or maybe it even ended at a different number, the high to the low throughout that year is normally a seven, eight, nine, 10, sometimes double digits so it is normal for there to be corrections within the year. It does not mean the year will end that way. I think that’s absolutely essential for us to keep in mind because we do take five steps forward at times and four steps back. If we believe that in the future that the market will be higher than where it is today, that’s why we have investments. If we didn’t believe that, why would we have investments? Keep it in your mattress, keep it in the bank. That makes no sense if you believe that long term the market is going to be lower than it is today over long term. I think that’s not a very wise bet.
I’m going to throw another chart on the screen; it’s a table. The reason why I throw this up there is because there is a well, you know, it’s just like the 1990s or it’s ‘07. Let me just tell you, look at the price to earnings ratio of about 15%. It was double that back in the late ‘90s. I mean from a valuation point of view, we’re nowhere near where we were in previous times when we’ve had a huge decline. We have lots of cash, a huge profitability, leveraging is down so this is a very good thing and the fundamentals I feel are still strong.
This last graph I want to show you I think is very, very important and that it shows historical returns by holding period. What you’re going to see is that on a yearly basis, that’s the one on the far left-hand side, there is a huge variance. The left one is 100% stock, unmanaged stock market index. The next one is 100% bond index and then there is a mix of the two together. With the one year, there is a huge variance. That’s just the way things work. Once we look out five years, 10 years, even 20 years that variance, that kind of expected return or that highs and lows have a tendency to kind of, the highs go lower and the lows go higher. For a 50/50 split historically, of course it could be different in the future, there actually has never been a five-year timeframe when the worst you’ve done is make 1% a year. Moving out to cash, thinking that you’re going to try to outsmart everyone else, that you are reading the headlines and you have some supposition of about what’s going to happen in the future I think is not very wise.
The very last thing I want to show before I cut this video is the benefits of having a stock and a bond mixed together. You’ve seen me do this before even with my hand. Up on the screen there is the 10-year Treasury note yield. It’s declined which is a good thing. The yield goes down when the price goes up. You can see that there is actually huge volatility in the last year. Those arrows there are in the last kind of year-to-date. This has been a great year to have bonds. In hindsight, having 100% of your portfolio in bonds would’ve been a fine thing to do. We don’t know hindsight so that’s why we have a mix of stocks and bonds and of course that mixture depends on the client what’s appropriate. Of course, having a well-diversified portfolio does not guarantee against declines in a general declining market, but I do believe that it is the wise way to go going forward. You can see that in the last month or so as the stock market has rarely gone down that the bonds have actually gone up. Once again, we know that because the graph went down which is counter-intuitive, but it actually meant that bonds went up so this is a good thing for bonds when the graph looks on the downside from left to right like that.
That’s what I have for right now today. I’m going to continue with these updates to you, my clients and to my friends and prospects, prospective clients. I’m here if there are any concerns that you have, 303-747-6455. Investments are a part of the big picture of getting you to where you want to go with your goals, etc., but I’m not overly freaked out about where things are at this point. Hey, would I wish that things were higher? Of course, of course, but do I over react and scrap my plan based on some weeks and months of data? Absolutely not and you shouldn’t either.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day, see you, bye-bye.
The deficit is the difference between tax receipts (inputs) and tax expenditures (outputs). The deficit has been declining over the past few years, but it’s not due to decreased expenditures, it’s due to increased revenues.
The private sector has been healing itself over the past 5 years, and it shows with the tax revenue.
