Optimism Sells. Be Careful What You Buy Into
How many times have I heard about financial advisors (almost, but not quite promising) stating that annual average returns in the 7% range are pretty easy to achieve? Conveniently forgetting to remind us that past performance is not a guarantee of future performance.
Yesterday, White House officials (Mnuchin, Kudlow, Hasset) were on the airwaves talking about an economy that will bounce back in the second half of 2020 and have a "tremendous snapback" in 2021. Meanwhile, Fed official Neil Kashskari "wishes" it were true, but expects a slow, more gradual recovery. The National Bureau of Economic Research has a working paper that is suggesting an "L" shaped recovery. Our friend David Rosenberg thinks it will be more of a "W" shaped recovery. So what's it going to be?
My natural skepticism suggests those least likely to have an agenda may be closer to the reality of the circumstances. Like Kashkari, I too wish for a strong economic bounce back, but to be honest and fair to myself and our clients, we need to be prepared for some disappointment.
Despite being told often enough by presidential tweet that stock market strength is representative of a great economy, there has been an increasing disconnect between the two. So frequently, lately, have I heard the optimists and "cheerleaders" tell us that the stock market is "forward looking". How far forward is it looking? would be my next question.
Factset, the folks who supply us with earnings data and estimates (remember earnings? one of the metrics, supposedly, for analyzing a stock's value) suggest that the current stock price to forward (12 months estimated) earnings (P/E) ratio has not been this high (expensive) since 2002:
My natural skepticism suggests those least likely to have an agenda may be closer to the reality of the circumstances. Like Kashkari, I too wish for a strong economic bounce back, but to be honest and fair to myself and our clients, we need to be prepared for some disappointment.
Despite being told often enough by presidential tweet that stock market strength is representative of a great economy, there has been an increasing disconnect between the two. So frequently, lately, have I heard the optimists and "cheerleaders" tell us that the stock market is "forward looking". How far forward is it looking? would be my next question.
Factset, the folks who supply us with earnings data and estimates (remember earnings? one of the metrics, supposedly, for analyzing a stock's value) suggest that the current stock price to forward (12 months estimated) earnings (P/E) ratio has not been this high (expensive) since 2002:
Forward earnings guidance by many (about 40% of) companies has been pulled as the crystal ball has gone particularly cloudy, so the "E" in the ratio is a "best guess" for analysts. For those of us who still care about fundamentals, that means that anyone buying stocks at this point is likely tacking on some pretty hefty risk.
David Rosenberg did remind us this morning: "Equities have become little more than a casino, with central bankers as the blackjack dealers as they do all they can to support the investment community".
For a deeper dive on the disconnect between stocks and the economy, the New York Times had this article: Repeat After Me: The Markets Are Not The Economy : "For decades, the market has been growing increasingly detached from the mainstream of American life, mirroring broad changes in the economy".
"So why do millions of Americans continue to think the market really is a barometer on the economy? That's more a question of history and culture than economics".
If you have a portfolio that is 60% equity, you may be gambling (vs. investing) a little more than you are lead to believe and the downside risk may be growing. Optimists tend to downplay the risk factors. Not that you should not have risk, we do need to take risk, but you need to be aware of what risk you have and how it may impact your investment portfolio, especially when markets are negatively impacted.
Our philosophy at High Rock has always been to manage risk first. That is one of the features that makes us different and better from those who just want to sell to you (their agenda). Our agenda is to invite clients who want that kind of risk-adjusted portfolio management.
As I suggested in my blog "Won't Get Fooled Again", it may be worth looking at your risk profile and trying to determine if, perhaps, you might want to revisit your investment risk, given the current circumstances. The time is now, while the stock market is strong. You don't want to be making these decisions when the market starts to reassess value and risk. Always happy to offer an opinion directly.
David Rosenberg did remind us this morning: "Equities have become little more than a casino, with central bankers as the blackjack dealers as they do all they can to support the investment community".
For a deeper dive on the disconnect between stocks and the economy, the New York Times had this article: Repeat After Me: The Markets Are Not The Economy : "For decades, the market has been growing increasingly detached from the mainstream of American life, mirroring broad changes in the economy".
"So why do millions of Americans continue to think the market really is a barometer on the economy? That's more a question of history and culture than economics".
If you have a portfolio that is 60% equity, you may be gambling (vs. investing) a little more than you are lead to believe and the downside risk may be growing. Optimists tend to downplay the risk factors. Not that you should not have risk, we do need to take risk, but you need to be aware of what risk you have and how it may impact your investment portfolio, especially when markets are negatively impacted.
Our philosophy at High Rock has always been to manage risk first. That is one of the features that makes us different and better from those who just want to sell to you (their agenda). Our agenda is to invite clients who want that kind of risk-adjusted portfolio management.
As I suggested in my blog "Won't Get Fooled Again", it may be worth looking at your risk profile and trying to determine if, perhaps, you might want to revisit your investment risk, given the current circumstances. The time is now, while the stock market is strong. You don't want to be making these decisions when the market starts to reassess value and risk. Always happy to offer an opinion directly.
No comments:
Post a Comment