Why You Should Not Be Bullish on Equities Now!Submitted by Benchmark Wealth Advisors, LLC on September 19th, 2017
The stock market performance has not been driven by the improving health of the global economy. Just as negative interest rates are not a positive for the continued health of the economy, nor does current stock market performance augur rosy future returns for stocks. In fact, the opposite is true. The bulk of the stock market gains are due to one variable: the expansion of the price-to-earnings ratio. S&P 500 earnings have stagnated since 2014. (For related reading, see: A Market Barometer: Corporate Earnings.)
Stock prices have gone up because the Federal Reserve and other central banks have squeezed all investors to the right side of the risk curve. Stocks, and especially high-quality ones that pay dividends, are looked upon as bond substitutes. Investors now look at the dividends of those stocks and compare those yields to what they can earn in Treasuries. But this strategy will end in tears, as these bond-substitute stocks are significantly overvalued.
We want to show you the headwinds investors are facing, and what we are doing to avoid having them deflate the sails of your portfolio. Summarizing, these headwinds are:
- The risk of lower or negative global economic growth. If we get higher economic growth, we’ll treat that as a bonus.
- Something-flation. Inflation (high interest rates), deflation (low interest rates) or screwflation (higher interest rates and deflation). We don’t know which of these extremes we’ll see and in which order. Nobody does. Despite their eloquence and portrayed confidence, financial commentators arguing one or another extreme point of view on CNBC/Bloomberg don’t know, either. In fact, the more confident they are the more dangerous they are. The difference between us and them is that we know what we don’t know and are therefore trying to construct an “I don’t know” portfolio that can handle any extremes.
- And finally, stock valuations will decline. (For more, see: Diversification and Lessons from a Normalizing Market.)
This is a time for humility and patience. Humility, because saying the words “I don’t know” is difficult for us testosterone-laden alpha male money manager types. (For more, see: The Upside of a Flat Market.)
Patience, because most assets today are priced for perfection. They are priced for a confluence of two outcomes: low (or negative) interest rates continue to stay where they are (or decline further) and above-average global economic growth. Both happening at once in the future is extremely unlikely. Take one of them away (only one!) and stock market indices are overvalued somewhere between a lot and enormously (we don’t even try to quantify superlatives). Take both away and…
This guide is for informational purposes; neither the information nor any opinion expressed constitutes personal advice. Please consult an expert before changing your personal finances, legal, insurance or tax plan.