Michael Santoli's column this week is called Round Trip Ruminations and explores an idea talked about on this blog for a while which is that we have had a decade long round trip to nowhere for the S&P 500 which in terms of market action is not much different than the 1970s.Given that the economic backdrop was so much worse during that time than it has been thus far in this decade makes me wonder which decade was actually worse for investors.
Some of Barron's other content explored whether the worst might be over for financials and the broader market. I don't think the worst is over but it is always worthwhile to explore the other side of your position.
One compelling reason why the worst could be behind us has to do with how anemic the bull market that ended in October was. This is along the lines of job losses have not been that bad compared to the past because the number of jobs added in the recently ended expansion were very low.
In the early days of this site I theorized about smaller peak to trough moves for the US as a function of maturity and size and while that may not stand up over truly long periods of time it might explain what is going on now and sets a path for this bear market and recession both being relatively mild.
To be clear this is not my baseline case for what will happen, I still believe a bear market that will be considered as having been average will be the outcome but the argument above is the best one I can think of for why the lows have been seen.
10 comments:
Roger,
Did you just call a bottom?? I have been waiting for a creditable FA to call one. Please be a little more clear.
Thanks,
BWJR
I don't think Roger is making a prediction one way or another.
According to Ned Davis Research the average bear market duration is 19 months and average loss is 30% (DJIA). We're currently in the tenth month with a 22.6% peak to trough loss. If we've seen the bottom, which is possible, this would be a milder than average bear market.
My guess is we're going to see another "feel good" rally before we see another significant leg down. My timing model components are indicating we're seeing oversold conditions turning, usually a sign of low downside risk. However, I don't expect this rally to last as long as what we saw from the March bottom.
I have just finished reading the "Intelligent Investor" by Benjamin Graham with comments by Jason Zweig. It is pretty amazing how dividend yield, P/B ratios, and P/E ratios (or inverse P/E ratios relative to bond yields) do a pretty good job of determining whether the market is skewed to being overvalued or undervalued.
The more things change, the more they stay the same.
Right now it would seem that the markets are fairly valued. From WSJ SP500 P/E is 17.6 (average of trailing and estimated) giving a earnings yield of 5.68%. Compare that yield to Lehman Aggregate of 5.29%. Also given that the market has a tendancy to overshoot on it way up and undershoot on its way down, I would say the bias is for lower valuations.
BWJR, the last paragraph says this is not my baseline case.
Hello Roger, long time no see..
Just thought i would add, there are a lot of whispers that with the BKX down 53%, it wouldnt be that far out to say there 'could' be a equal drop in the dow, if a little math is put to work a permabear would see this easily..
Mac
Couple of thoughts:
we have had a decade long round trip to nowhere for the S&P 500 which in terms of market action
My view is that this concept of a "decade long round trip to nowhere for stocks" is potentially misleading because it masks the tremendous differences/divergences and opportunities that have existed at that sector level.
4-5 sector decisions, and the performance is radically different. Capture some part of the 98-00 tech bull, avoid most of the 00-02 tech bear, capture the energy and material bull since 2003 to present, and avoid the financial bear since Aug 07, and the returns are completely different then passively holding the index for 10 years.
And this isn't just hindsight cherry-picking. I personally avoided most of the tech bear from 00-02 based on technicals, have been long energy for years, and have been ZERO in financials for the last couple years because I thought they were a house of cards waiting to collapse (and I was right).
http://stockcharts.com/charts/performance/perf.html?$SPX,XLK,XLE,XLB,XLF
Look at that chart over the past several years. Totally different story. My only point is that this concept obfuscates the opportunities that exist at any point in time. Energy, emerging, commodities, gold, real estate, etc. All sorts of things that did really well the past 10 years, and it just took having a diversified portfolio that held a few to have decent positive returns for a portfolio.
The big takeaway IMO is that the notion of having one's "stock" allocation 100% invested in the S&P 500 is thoroughly discredited and should be flushed down the toilet where it belongs. Multiple asset class diversification is a necessity, and with a little work I don't think it is impossible to overweight those likely to be the big winners. FWIW, I think gold and energy will continue to be outperformers the next 3 years or so for the same reasons they have been outperformers the past 3-5 years.
Right now it would seem that the markets are fairly valued. From WSJ SP500 P/E is 17.6 (average of trailing and estimated) giving a earnings yield of 5.68%.
Good note from Hussman's Bill Hester on valuations:
http://www.hussman.net/rsi/medianvaluation.htm
I agree with you. I do not think the bear is over nor will it until housing recovers.
Dynan Candon
mike c
Thanks for the link. Nice to know there are still those who believe the value of stocks ultimately depend on earnings and the value of alternative investments.
As an index investor, I'm near the lower limit of the rebalancing band. I'll stick with my rebalancing approach, but it will be interesting to keep notes to determine if dymanic asset allocation, as Bernstein calls it, can enhance returns.
I just need a good return, not the best return.
Mike C, that is exactly the point of the round trip to nowhere concept. the broad market has been on a big round trip. adding value has required going to the sector level, country level and theme level.
more importantly, looking forward there is visibility for this to continue which means it will be all the more important for investors to be willing to learn and implement in this fashion.
Roger:
What are your categories and cutoffs for market caps? ie large cap >100B, <200B.
Post a Comment