First, thank you to everybody who took the time to watch the news clip from yesterday and for the kind feedback I received from many of you.
This evening, as Facebook is down over 20% after-hours, I wanted to share an eloquent explanation of an important concept: the distinction between WEALTH and STOCK PRICE.
Dr. John Hussman wrote an interim special commentary back in November. Within it, there is a section that provides important perspective. It’s so well-stated I’m simply going to share it verbatim. The bolded parts are my emphasis. Enjoy.
Market capitalization isn’t wealth, and it can quickly evaporate
As I’ve regularly noted, there’s no “getting out” of the market in aggregate – someone has to hold every share of stock outstanding, so there’s no point in advising investors to “sell.”
Currently, the market capitalization of U.S. financial and nonfinancial equities stands at roughly $68 trillion, about 3 times the $23 trillion level of U.S. GDP. At the 2000 market peak, the record was about 1.9 times GDP. Indeed, the present ratio of U.S. market cap to GDP is nearly 50% above levels that were never observed prior to last year.
Market capitalization isn’t “wealth.” It’s the latest price, times shares outstanding. Blotches of ink on paper. Flashing pixels on a screen. If a dentist in Poughkeepsie buys a single share of Apple at a price that’s 10 cents higher than the previous trade, $1.6 billion in market capitalization emerges from thin air. If a single share trades 10 cents lower, $1.6 billion evaporates just as quickly. Whatever happens, every security in existence has to be held by someone until it is retired.
Ultimately, the wealth inherent in a security is the future stream of cash flows it will deliver to its holder(s) over time.
Price fluctuations don’t change those underlying cash flows. They just provide opportunities for the transfer of savings between investors. High valuations favor the sellers. Low valuations favor the buyers. Investors have never paid higher prices for those future cash flows, or accepted prospective returns so low.
Put simply, the bubble hasn’t changed the wealth, and a collapse won’t change the wealth. What will change is the market cap. I suspect that the erasure of market cap in the coming years, and possibly the coming quarters, may be brutal… Meanwhile, even if an investor sells at these extremes, the only thing that will change is who holds the bag.
The main consideration, then, is to make sure that your own investment position is actually aligned with your own investment horizon and risk-tolerance. In the event that you choose to be heavily invested in stocks, at least take a moment to write out your reasons, and to clearly identify the evidence you’re using.
– Dr. John Hussman, November 22, 2021
Disclosures:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.
This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.
