Today's Market
by Dr Invest
I have never heard so much enthusiasm for stocks after the market took such a beating only two months ago. Once again smooth throated brokers and advisers are harping their products. The promise is that the economy is on solid ground and can go no where but up. They admittedly accept that fundamentals are pointed downward, but that such facts are only temporary anomalies and that soon positive fundamentals will support the rapid rise in the stock market.
What they don't seem to realize is that the temporary rise in the stock market comes from overly enthusiastic speculators and that stocks remain over-valued. John Bogle, the founder of Vanguard has always been in love with the market and built an industry around the idea of BUY AND HOLD. Listen to what he recently said:
Investors can look forward to stock-market gains of 4 percent a year for the next decade.
He says that investors will be unwilling to overpay for earnings and dividends from publicly traded companies, making gains hard to come by. By comparison, the S&P 500 has tripled in value since bottoming in March 2009 as the U.S. struggled to recover from the worst recession in 80 years.
In an interview with Morningstar’s personal finance editor Christine Benz, he says his assumption is based on a 2 percent dividend yield for the S&P 500 and earnings growth of 5 percent.
Cutting into that 7 percent return will be a 3 percent loss from “multiple compression,” meaning investors will buy stocks at a lower price-to-earnings ratio. The market’s P/E multiple is likely to fall to a longer-term average of 15 times from about 20 now.
“We've got a 4 percent return for stocks — maybe a little bearish, but we just don't know — and a 3 percent return for bonds. That's a 3.5 percent return on a balanced 50-50 portfolio,” Bogle says. Unfortunately, investors need to consider fund-management fees that will also cut into returns.
Despite the subdued forecast, Bogle says, “Invest we must,” because inflationary forces will eat away at savings.
“The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns,” he writes. “As for pensions, which continue to plug the customary 7.5 percent returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.”
In this new forecast, Bogle joins the ranks of notable value investors and market observers Jeremy Grantham, Robert Arnott, and Robert Shiller , whose dim views of stock valuations and future returns are well-documented.
Bogle’s new forecast amounts to a tacit admission that the “equity risk premium” (the supposed amount of excess return that stock are supposed to deliver over bonds) isn’t static. Rather, it can change over time. Stocks are not always guaranteed to deliver, say, 10% annualized returns on a nominal basis, even over decade-long periods.
Academic studies have shown that the Shiller PE has greater statistical validity than a conventional PE at forecasting future returns. One year’s worth of earnings can be misleading. Nevertheless, Bogle and the value mavens are now in agreement about likely future returns.
Balanced portfolios under siege
On bonds, Bogle thinks investors can squeeze 3% from a fixed-income portfolio with an average maturity that’s a little longer than 10 years and ia somewhat heavy in corporate bonds. The 10-year Treasury TMUBMUSD10Y, +4.08% currently yields slightly more than 2%.
Overall, the implications for a standard balanced portfolio are grim.
Bogle predicts that a balanced portfolio (roughly half in stocks and half in bonds) should return around 3.5% for the next decade. Adjusted for inflation or in “real” terms, Bogle thinks a balanced portfolio will return 1.5%, barely increasing purchasing power.
Fees may destroy paltry returns
Bogle then asserted that fund fees of, say, 1%, will destroy much of that balanced portfolio’s real return. Combined with advisor fees of 0.50% (a conservative number), investors may be left with nothing after adjusting for inflation.
Moreover, taxes and well-documented investor bad behavior (buying funds at high points and selling them lower) will likely erode investor returns further.
Benz raised the question of whether investors should invest at all given this forecast, and Bogle said, “Invest we must.” The reason for that is cash is yielding virtually nothing, which means it’s producing a negative return in real or inflation-adjusted returns.
Given Bogle’s grim view, however, it isn’t clear why investing really is better since it can also produce negative real returns.
Only yield is certain
Bogle also stressed that the only certain part of his stock forecast is the starting dividend yield of stocks. Earnings growth and multiple changes are always guesses, and he could be wrong about both.
Both advisers and investors can plug other numbers in for earnings growth and multiple changes. Still, they should be careful not to veer far from historical precedent. For example 10% earnings growth would be “beyond precedent.”
Save more and ignore pension forecasts
Investors should take serious note of Bogle’s forecast.
The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns.
As for pensions, which continue to plug the customary 7.5% returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.
Amongst the enthusiastic voices declaring a "new age" has come of continued and everlasting market conditions due to a vigilant central bank are long-time perma-bulls warning that the party is over. Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.
"Their observation is that usually stock withdrawals move into bond funds," Yamada wrote, "but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting."
Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.
The other three -- June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to -- occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors' none-of-the-above attitude as a contrarian "buy" signal for stocks turned out to have jumped in too early.
Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.
Concluding Thoughts
by Dr InvestI have never heard so much enthusiasm for stocks after the market took such a beating only two months ago. Once again smooth throated brokers and advisers are harping their products. The promise is that the economy is on solid ground and can go no where but up. They admittedly accept that fundamentals are pointed downward, but that such facts are only temporary anomalies and that soon positive fundamentals will support the rapid rise in the stock market.
What they don't seem to realize is that the temporary rise in the stock market comes from overly enthusiastic speculators and that stocks remain over-valued. John Bogle, the founder of Vanguard has always been in love with the market and built an industry around the idea of BUY AND HOLD. Listen to what he recently said:
Investors can look forward to stock-market gains of 4 percent a year for the next decade.
He says that investors will be unwilling to overpay for earnings and dividends from publicly traded companies, making gains hard to come by. By comparison, the S&P 500 has tripled in value since bottoming in March 2009 as the U.S. struggled to recover from the worst recession in 80 years.
In an interview with Morningstar’s personal finance editor Christine Benz, he says his assumption is based on a 2 percent dividend yield for the S&P 500 and earnings growth of 5 percent.
Cutting into that 7 percent return will be a 3 percent loss from “multiple compression,” meaning investors will buy stocks at a lower price-to-earnings ratio. The market’s P/E multiple is likely to fall to a longer-term average of 15 times from about 20 now.
“We've got a 4 percent return for stocks — maybe a little bearish, but we just don't know — and a 3 percent return for bonds. That's a 3.5 percent return on a balanced 50-50 portfolio,” Bogle says. Unfortunately, investors need to consider fund-management fees that will also cut into returns.
Despite the subdued forecast, Bogle says, “Invest we must,” because inflationary forces will eat away at savings.
“The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns,” he writes. “As for pensions, which continue to plug the customary 7.5 percent returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.”
In this new forecast, Bogle joins the ranks of notable value investors and market observers Jeremy Grantham, Robert Arnott, and Robert Shiller , whose dim views of stock valuations and future returns are well-documented.
Bogle’s new forecast amounts to a tacit admission that the “equity risk premium” (the supposed amount of excess return that stock are supposed to deliver over bonds) isn’t static. Rather, it can change over time. Stocks are not always guaranteed to deliver, say, 10% annualized returns on a nominal basis, even over decade-long periods.
Academic studies have shown that the Shiller PE has greater statistical validity than a conventional PE at forecasting future returns. One year’s worth of earnings can be misleading. Nevertheless, Bogle and the value mavens are now in agreement about likely future returns.
Balanced portfolios under siege
On bonds, Bogle thinks investors can squeeze 3% from a fixed-income portfolio with an average maturity that’s a little longer than 10 years and ia somewhat heavy in corporate bonds. The 10-year Treasury TMUBMUSD10Y, +4.08% currently yields slightly more than 2%.
Overall, the implications for a standard balanced portfolio are grim.
Bogle predicts that a balanced portfolio (roughly half in stocks and half in bonds) should return around 3.5% for the next decade. Adjusted for inflation or in “real” terms, Bogle thinks a balanced portfolio will return 1.5%, barely increasing purchasing power.
Fees may destroy paltry returns
Bogle then asserted that fund fees of, say, 1%, will destroy much of that balanced portfolio’s real return. Combined with advisor fees of 0.50% (a conservative number), investors may be left with nothing after adjusting for inflation.
Moreover, taxes and well-documented investor bad behavior (buying funds at high points and selling them lower) will likely erode investor returns further.
Benz raised the question of whether investors should invest at all given this forecast, and Bogle said, “Invest we must.” The reason for that is cash is yielding virtually nothing, which means it’s producing a negative return in real or inflation-adjusted returns.
Given Bogle’s grim view, however, it isn’t clear why investing really is better since it can also produce negative real returns.
Only yield is certain
Bogle also stressed that the only certain part of his stock forecast is the starting dividend yield of stocks. Earnings growth and multiple changes are always guesses, and he could be wrong about both.
Both advisers and investors can plug other numbers in for earnings growth and multiple changes. Still, they should be careful not to veer far from historical precedent. For example 10% earnings growth would be “beyond precedent.”
Save more and ignore pension forecasts
Investors should take serious note of Bogle’s forecast.
The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns.
As for pensions, which continue to plug the customary 7.5% returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.
Amongst the enthusiastic voices declaring a "new age" has come of continued and everlasting market conditions due to a vigilant central bank are long-time perma-bulls warning that the party is over. Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.
"Their observation is that usually stock withdrawals move into bond funds," Yamada wrote, "but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting."
Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.
The other three -- June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to -- occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors' none-of-the-above attitude as a contrarian "buy" signal for stocks turned out to have jumped in too early.
Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.
Concluding Thoughts
We may see one of the greatest rallies in the U.S. ever seen since the beginning of this nation; although, a rally is not very likely in the current economic environment. Perma-bears have been giving a warning since 2012 when Q.E. began along with bond purchases by the FED. But now many perma-bulls are warning that valuations are too rich and fundamentals are too weak.
I mentioned that six weeks ago some of my friends were very worried. They believed that a the bull market had abruptly ended. I encouraged them by suggesting a "dead-cat bounce" was in order and to hold on until the market rebounded, then take profits.
I now thing that the fear has waned and the bears have been converted to bulls again. The next decline will not be so kind. I suspect that a HEAD AND SHOULDERS PATTERN will be unfolding over the next few months. Best guess is a head forming into January with the right shoulder completing in March or April of 2016.
If you don't know what I am talking about, do a WIKI search for HEAD AND SHOULDERS PATTERN. Keep your eye on the S&P 500 and when you begin to seen a slow decline in January, run, don't walk to your nearest broker. We could see a decline that was even worse than in 2008.
(note: the above information is for entertainment purposes only and in no way should be used as investment advice.)
