Image Credit: Aleph Blog || Really, do you want to earn 3 1/2% for the next 10 years?
At present, the S&P 500 is priced to return 3.51%/year over the next ten years. Now if you were buying some ten-year investment grade corporate bonds, you might expect something around 2%. Is that 1.5% over corporates worth it?
Truly, I don’t know. That said, you have choices. The most overpriced segment of the market now is the large cap growth FANGMAN stocks, which accounts for around 25% of the S&P 500. You can choose safer areas:
- Small cap stocks
- Value stocks
- Cyclical stocks
- Foreign stocks, including emerging markets
- Financial stocks, and maybe if you dare, energy stocks
Now I know that what I said here embeds an idea that GDP will start to grow again. Even with the lousy economic policy at present, over the next twelve months, under most conditions, the economy will grow as government reactions to the C19 virus decrease.
That said, the actions of the Fed in providing credit zoomed through the markets, and pushed stock prices up. Good for the wealthy, less good for ordinary people. Remember, I don’t think it is proper for the Fed to target the stock market. But that is what they are doing through QE.
The graph above shows what returns typically come when expected return level are as low as they are today. You shouldn’t be expecting much here. What?! You think the market will rise to the heights of the dot-com bubble and beyond?
Look, even if the big tech companies are profitable, having the S&P 500 in the mid-4000s is not sustainable. The companies will never grow into those valuations even if the economy recovers.
This is a time to lighten risk positions, or at least to move to stocks that have not been the leaders. Take this opportunity, and lessen your risks. Don’t drive through the rear-view mirror. Look to the mean-reversion that will come, as it did in 2000-2001.
Consumer surveys done during September are showing 75% of consumers experiencing budget issues due to FOOD INFLATION. For clueless Fed employees who don’t do their own grocery shopping nor pay for their own food, grocery prices may be going down. For everyone outside of Washington DC, food prices are noticeably higher.
Health care costs have been climbing double digits every year since Pelosi shoved Obamacare down our throats and exempted Congress. Yeah yeah, Fed staffers don’t pay that either.
College costs and property taxes (local schooling) were climbing high single digits even before they started teaching by zoom video. This doesn’t factor the loss of quality (in addition to price hikes) from colleges essentially becoming left wing indoctrination centers. Good luck to anyone who thinks their Ivy League kid has a snowflakes chance in heck competing against kids from foreign countries where they learn STEM instead of wokesterism.
If the consumer is 70% of the US economy as Wall Street strategists keep saying, then jerry Powell had better pull his head out of his own backside and realize true inflation is much higher than what his reports tell him. Debt has been used to paper over the problem, which should be obvious to anyone who earned a PhD.
Wall Street priced in a quick recovery, while Main Street saw its recovery burn up in higher prices— better known as inflation to economists. Lots of people talking about the disconnect between Wall Street and Main Street
Earnings growth will be subdued, and stock prices too, until the Fed reconnects with reality. Using debt to paper over high single digit inflation is not a path for growth, and Powell should know that if he is qualified for the job (bernanke and yellen proved they were never qualified in the first place)
Raise your hand if you are a blue collar worker, someone historically associated with the Democrat Party. For these traditional democrat voters, how many of you were paid $650,000 per year to serve on the board of a foreign company where you didn’t speak the language at all and you didn’t know a thing about the industry of said company? How many blue collar workers would get this sort of job after a drug conviction? Hunter Biden got this deal, and his daddy says that is just how Washington DC works. Oh, then the unqualified drug addict went on to get “fees” for arranging M&A deals in China, despite not speaking Chinese or knowing anything about any of the companies.
According to polls, there is a non zero chance that this sort of corruption will be back in the White House… well, not exactly. The chief bribe solicitor now has dementia, while most of his campaign staff are self declared socialists and Marxists.
Stocks are all worth zero under socialism. That includes stocks backing public employee pension funds. That includes stocks backing insurance annuity contracts. That includes stocks backing private sector union pension funds. All pensions are worth zero under socialism.
If your daddy isn’t Vice President and can’t get you a lucrative bribe from a foreign government, you should be very worried
I’m getting to the point where I may not approve off topic comments. Bad as Socialism is stocks don’t get killed under Socialism — read Triumph of the Optimists.
Ha ha!!! Raise your hand if your Ukrainian stocks did as well as Hunter Biden did.
Appreciate your post and find it very interesting. I love the derisking comments and I would say that I have already done that as Apple is my only outlier and its a smaller position. I have a lot of beatup dividend stocks. My actual question is how do you come up with 4% growth?