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.