The other issue is that we keep focusing on 2000 and 2008 … but virtually all market corrections are smaller and briefer and consequently less painful. We have no reason to expect a repeat of either since both were the result of fairly unique conditions, not just regular up and down of the market.
Markets correct with recessions. As to the depth of the correction, there has historically been a large correlation with market valuation levels at the beginning of the decline.
This article has a table illustrating that. Note that it is from 2016, valuations now are much higher.
In other words, just from valuations alone, you should expect a very deep, very painful decline in the stock market, starting half a year to a year prior to the next recession.
This is nothing but an unavoidable observation when you look at the historic data.
Maybe this time will be different. But probably not.
Also, there are good reasons to think that the next recession in the US is going to be deeper/longer than the average post-WWII recession (though not as bad as the 2008/2009 Great Recession).
Interest rates are likely going to still be relatively low when the recession hits, giving the Fed relatively little room to stimulate the economy. Fiscal policy is also going to be a problem. Due to the large recent increases in government spending and the massive tax cuts, the US federal government is now running a deficit of 4.2% of GDP at the peak of the economic expansion (data: FY 2018).
When the next recession comes, falling tax revenues and increases in unemployment spending etc. will easily push that to 7% or 8% (1.2+ trillion USD).
Instead of being able to stimulate the economy through fiscal means, we might see spending cuts which are profoundly damaging when they are done during a recession.
I see very little hope that the next recession is going to be as brief and light as the 1990 and 2001 recessions.
And a long and deep recession means that you will see much lower IT budgets for prolonged periods of time and many SaaS companies will suffer a lot.
I’m pretty much a lurker here-trying to follow Saul’s and the board’s rules and singular focus. I have benefited by sampling some of the stocks uncovered and(re)-evaluated by this group.
You folks do a great/amazing job of finding and evaluating investment opportunities in equity markets. When you are doing that, you are on fire.
This other thing about investment philosophies and who is ‘right’ and naysaying is a distraction. It’s already handled in the ‘get your big girl/boy pants on’ caveat emptor stuff on the KB. Otherwise, folks can differ-but don’t interrupt the board unless you are addressing risk of a stock or group of stocks. That’s right, an actual risk considered identified and broken down is welcome here. No one wants to be blindsided.
I suspect that during a downturn this group will explore some new opportunities and some strategies to get through it. Until then, looking into high growth stocks is what’s going on here. Enjoy it.
Looking forward to learning more from the board next time. Back to my seat and back on task.
Do you mind to share your performance over the last 10, 20, 30 years? Saul and lots of key members of this board have been sharing their monthly holdings and performance every month. They are not just preaching a method, they are doing it, proving it in the real time. If you can do the same and show your great performance, maybe you can earn some respect here. Otherwise please don’t clog this board with some worthless advice gleaned from the internet.
Except that we know that there have been some systematic shifts which are by themselves going to produce higher valuations now than in the past. One is simply not comparing apples to apples. One of the most obvious of these is shifts in GAAP which result in lower earnings with no actual change in the company’s financials.
On top of which I think there have also been some shifts in what one might call corporate strategy. Notable in this I think is an increasingly common orientation for companies to pour cash flow into future growth, not caring about earnings, contrasting with an earlier philosophy where growth in earnings was considered a primary goal. That too is going to dramatically reduce earnings relative to revenue and yet, in a successful company, is actually going to result in faster growth.
Do you mind to share your performance over the last 10, 20, 30 years?
Not as good as Saul’s, not by a long shot. I sold my stocks some time in late 2012 if I remember correctly, mostly because I needed the money to buy land but partly also because I was worried about another economic downturn in the US (which never happened).
If you want to see the track record of my predictions, I think this post is illustrative. It’s from late 2003, and it was titled “Expect no returns”. I ended up being right … eventually. At the time of the post, the SPX stood at approx. 1040. Five and a half years later, it bottomed out at 735.
Of course in the time period after that post, the SPX went up by 50% first, while I was busy shorting home builders during 2004 in anticipation of the bursting real estate bubble (I was also long commodities for years, but not nearly as much as I should have been).
I bought in again in late 2008, and sold in 2012, much too early.
What I have learned from all this - and from spending several thousands of hours of studying financial history - is this:
Don’t try to time the market (unless the economy it in the late stage of the economic expansion (at least 7 years of growth) and valuations are high)
If valuation are very high, assume that returns between now and the next recession will be negative, even if that takes years to come about
The reason why I’m so vocal about this now is that from historical experience, it’s very clear that most people will have negative returns for the time period between 2016 and the next recession, and perhaps even between 2013 and the next recession. Judging from historical data, it’s very, very unlikely that the SPX will remain over 2000.
Market valuations are CATASTROPHICALLY HIGH, and the “expect negative returns” thesis between now and the next recession is about as safe a bet as you can make in the financial markets right now.
Except that we know that there have been some systematic shifts which are by themselves going to produce higher valuations now than in the past. One is simply not comparing apples to apples. One of the most obvious of these is shifts in GAAP which result in lower earnings with no actual change in the company’s financials.
This is not clear to me from the macroeconomic data, as the corporate profits share of GDP is much higher than the historic norm.
On top of which I think there have also been some shifts in what one might call corporate strategy. Notable in this I think is an increasingly common orientation for companies to pour cash flow into future growth, not caring about earnings,
This is not visible in the macroeconomic data on business investment, which is low by historic measures.
“I bought in again in late 2008, and sold in 2012, much too early.
What I have learned from all this - and from spending several thousands of hours of studying financial history - is this:”
As I thought…what you have learnt is absolutely nothing…
What are you doing on this board trying to preach your devils advocate…it’s not even a history lesson. You messed up… get over it. We all have been there and don’t need to learn from your mistakes and be told how concerned you are for what trouble we could get into.
Comparison to GDP is not relevant to evaluating a company.
It is, if we’re talking about evaluating broad market valuations.
If companies - broadly speaking - are making more business investments than usual and their profits are lower for GAAP reasons, then that should be showing up in the macroeconomic statistics. But it’s not. The opposite, in fact.
Do you have any data to support your thesis (high business investment, low profits)?
The S&P is a market cap weighted index, which will therefore by dominated by the largest companies in the index. GDP is not weighted and includes many, many more companies than the S&P, not to mention lots of product which is not companies. Thus, if there is a change in character of the largest companies in the index, the characteristics of the index can change significantly without changing the overall economic picture.
I submit that not only have the factors I discussed significantly impacted the largest companies in the index, but that, in fact, the largest companies in the index have changed to companies which both show these differences and which are more likely to exhibit such characteristics because of the nature of the business.
The archetype of this, of course, is AMZN, which has always been richly valued on conventional metrics and yet keeps on growing and growing and growing.
Market valuations are CATASTROPHICALLY HIGH, and the “expect negative returns” thesis between now and the next recession is about as safe a bet as you can make in the financial markets right now.
So, what do you propose that investors on this board do? Other than sell out of stocks at least 6 years before the bull market ends.
I bought in again in late 2008, and sold in 2012, much too early. What I have learned from all this - and from spending several thousands of hours of studying financial history - is this:
It takes guts to admit this. I respect that. But I think you really are not built for volatility. My Portfolio dropped 50% in 2016, didn’t even phase me. My portfolio now is at the highest it has ever been. I have been investing since 1990 when I opened my first index fund. When 2008 and 2009 were happening and everyone was screaming get out of the market I was just starting to get excited. When Cramer came on tv I had to laugh. So what I am saying is while your advice may be great for people with your temperament, it really does not suit everyone.
what do you propose that investors on this board do? Other than sell out of stocks at least 6 years before the bull market ends.
Not speaking for Advo, but I’d say if you have made some coin on these stocks, and you don’t have significant investment in other productive asset classes, it’d be wise to take some off the top and invest in another asset class or two, maybe looking for those that have not been on the 10 year tear that the US stock market has been on.
I.e. say you have an IRA in which you bought a few hi-tech growth stocks with great looking fundamentals and potential market like Saul and others talk about, and you hit the jackpot and find yourself with $50k in your IRA and it’s the first real money you’ve ever accumulated. I’d suggest taking at least ~$10k (20%) and move it into an international stock index fund (to avoid manager risk and minimize expenses) and a bit of cash or short term bond, something like $7,500 (15%) international ex-US index and $2,500 (5%) cash. That’s just some minimal level of diversification that will enable you to capture some rebalancing bonus and smooth out the wild ride which will absolutely shake some people right out of the market on the downside if they’re not prepared.
Market valuations are CATASTROPHICALLY HIGH, and the “expect negative returns” thesis between now and the next recession is about as safe a bet as you can make in the financial markets right now.
That’s a bold statement! I would like to present information to rebuke such an assertion. For these matter’s I refer to a market technical expert. Weekly videos are produced by Chris Ciovaccio at www.ccmmarketmodel.com. His bona fides are in the about section. Referencing a weekly video called short takes, Civoaccio posted on 8/17/2018 with the following commentary:
“When viewed in the context of history (1935-2018), there is a valuable message hidden in present-day valuations, technicals, demographics, and asset class behavior. The video reviews facts; you can draw your own conclusions.”
I went through the video and made screenshots highlighting specific and very worthy chart views with some commentary for a few of my close investing friends trying who are trying learn to be better retail investors. [And yes, I’ve already referred them to Saul’s KB first ]
This covers momentum oscillators, some work done by Ned Davis Research covering the market valuation I am rebuking, and a high level view of the Schiller PE ratio for better context. Overall, the technical indicators do not suggest we are currently about to enter a bear market, nor are valuations catastrophically high. However, that adjective is very subjective so maybe our German poster can provide more quantitative data to support that assertion?
So, what do you propose that investors on this board do? Other than sell out of stocks at least 6 years before the bull market ends.
That depends a lot on individual circumstances (not least regarding the tax situation). As a general rule, I’d recommend not adding to any positions unless it’s really defensive. If you have money coming in, put in a savings account or something. There will be the opportunity to buy cheaper.
If somebody has credit card debt or some otherwise tenuous debt situation, they should sell sufficient stocks to cover that.
But if you’re sitting on huge gains on stocks you’ve been holding for ten years, you might just keep everything.
My father is in that situation. I pushed him to go all in in late 2008, and he’s held on to most of his stocks since then (unlike me). But in the meantime, the tax situation in Germany has changed, making it very disadvantageous to sell anything. So I went through the list of his holdings recently and I think I’ll advise him just to keep holding everything unless things get really crazy (like if the market goes up another 30% over the next year). But even then, I’m not going to recommend that he should sell his BRK position, for example.
What I would like people to do is to reflect on the right course of action for them given the likelihood that their (high tech growth) stocks will undergo a massive decline over the next few years and that some - or more than some - will never recover.
There are people on this board who are investing on credit in one way or the other. Whose job may be in danger during the next recession. And who don’t understand the risks they’re taking.
Not nearly everyone on this board is sitting on big gains, and can afford to ride out a massive decline. But the advice given by the board regulars never tends to address that reality.
The most general advice I’d have to give is: “Don’t put yourself in a situation where a 75% decline in your portfolio and the simultaneous loss of your job will wreck your life”
There are people on this board who are investing on credit in one way or the other. Whose job may be in danger during the next recession. And who don’t understand the risks they’re taking.
Not nearly everyone on this board is sitting on big gains, and can afford to ride out a massive decline. But the advice given by the board regulars never tends to address that reality.
The most general advice I’d have to give is: “Don’t put yourself in a situation where a 75% decline in your portfolio and the simultaneous loss of your job will wreck your life” <<
Saul and others on this board have repeatedly recommended keeping funds needed over the next 5 years out of the market. Since the average bear market lasts 18 months trying to predict the demise of the current bull market is a fool’s errand. So with that philosophy I feel comfortable in retirement investing a rising portion of my portfolio in these growth stock, knowing that I cannot only weather the correction but take advantage of it.
Please post a list of companies that constitute good investments which are sure things
Utilities. BRK. MSFT (in so far as its business is concerned, but the stock is very expensive).
Even adjusting for the tax effect, MSFT has a P/E of like 35. Assuming a 5% growth rate, that looks really, really expensive. But at least you can be pretty sure that MSFT will still be there 10 years from now and will make more money than currently. That’s definitely not certain for most tech growth stocks.
Apple (also expensive, but I’d prefer it to MSFT, at least).
Not WMT, because they’re getting crushed between AZMN on the one side and the aggressively expanding German discounters (Aldi, Lidl) on the other.
I just went through a lot of names on my long-term watch list and basically everything is way too expensive.
]