I came across an extremely relevant and appropriate quote recently, “Nothing so undermines your financial judgement as the sight of your neighbor getting rich.” – J.P. Morgan (h/t Jesse Felder)
It’s been a while since I’ve made a video, but, given the conversations I’ve been having as of late, it’s time.
How do you know if an asset is cheap, expensive or fairly priced? In this new presentation, I walk through valuations, how they’re calculated, what has made them so reliable for predicting future returns, and why we need to constantly remind ourselves of this principle when the temptation to chase performance in overpriced, poor quality assets grows strong.
With the market’s momentum from 2019 continuing on into 2020 so far, I wanted to provide a valuation update. Please remember that valuations are not reliable at all for short-term market timing but are very reliable for subsequent 10-12 year return projections.
First, we have a couple price-to-revenue measures. Continue reading “Stock Market Valuation Update”
This morning we learned that the November employment report was tremendous! U.S. companies added over 260,000 jobs, which far exceeded expectations. This pushed the employment rate back down to 3.5% matching the low from earlier this year, which is the lowest since 1969.
There were some concerns about the potential for this report because the ADP employment report from Wednesday was so poor. That ADP report indicated private sector job growth of just 67,000 compared to the 157,000 expected.
The large discrepancy between the BLS report we received this morning and the ADP report from a couple days ago is very strange. Perhaps the truth lies somewhere between the two, but for now, the market appears to be taking the government BLS report at face value as the S&P 500 is up over 1.0% on the day at the moment.
The employment-population ratio held steady at 61%. Construction job growth slowed to just 1,000. Speaking of construction jobs….
Over the last couple weeks I provided you with two videos. There have been a couple developments since I released those. Continue reading “Huge Employment Report and Video Follow Up”
The rally that began around Christmas Eve continued with strength through last week.
It’s been such a strong rally that U.S. large company stocks (as measured by the S&P 500 index) even eclipsed the prior record high from last September…admittedly, an event of which I was skeptical.
Specifically, on September 21st the S&P 500 set a new intra-day high at $2,940.91. However, last Wednesday the S&P 500 touched $2,954.13 before closing down to $2,923.17. As I write this commentary on May 6th, the S&P 500 is trading around $2,910.
Now, unfortunately, the S&P 500 was the only major index to set a new high. U.S. small company stocks (Russell 2000) are still down over 8% from their August 31st record. The global stock market more broadly, including foreign developed and emerging markets (MSCI All Cap World Index), is still down over 6% from it’s all-time high set almost 16 months ago on January 26th, 2018. Yes, the global stock market is still technically in a bear market.
Here is the interesting part, when reviewing one of the most reliable valuations metrics available from John Hussman, we find that the U.S. stock market has experienced current extremes only two other times in history (1) 1929: on the eve of the Great Depression and (2) 2000 – on the eve of the Dot Com Bubble burst. Neither of those events ended well, and I don’t expect the current dislocation to end well either. Continue reading “Market Update – Only Two Other Times in History”
As discussed at length, I have significant concerns about U.S. stock market valuations and what that may portend for the next bear market. After all, the most reliable valuation metrics are indicating the U.S. stock market is more expensive than ever before (including 1929 and 2000).
Although valuations aren’t useful for short-term trading, valuations do provide insight into the potential severity of the next downturn. So whether the next bear market has already kicked off with the January 26th peak or starts 12 months from now, the key to understand is it will likely be commensurate with the extremity of current valuations (i.e. severe).
A couple proactive approaches I’ve offered for consideration to preserve financial independence is either (1) under-weight U.S. stocks in favor of other asset classes, including bonds, and/or (2) incorporate “put options” to insulate portfolios from a significant stock market decline. Today, I’ll focus on what I’m doing within the bond sleeve of portfolios I manage. Continue reading “How I’m Managing Bond Investments At This Stage in the Cycle”