If I’d known the people reading this pathetic blog were so damn well off, I’d have dressed better. At least changed my leather Harley-Davidson briefs. It’s one thing to make a lot of money (we already know you do that), but quite another to accumulate wealth. So after reading yesterday’s comments on net worth, new respect. What a rapacious horde of capitalist swine we are. I am so proud.
Of course, we also want to keep it that way. So let’s talk about markets, and risk.
On Tuesday the Globe asked its readers (a collection of druggie, infested homeless people compared to you) whether they were concerned or not about a stock market correction. Just 14% said they were very anxious. Half were somewhat worried. A third were confident.
Let’s compare that with a Bloomberg survey done a few days ago among institutional investors, analysts and traders. They see it this way: 47% say the market is close to unsustainable levels, while 14% concede it is already in a bubble.
In other words, 86% of retail investors (the little guys) are cool with things the way they are while 63% of financial pros (the insiders) are worried. So, should you fret?
Let’s recap. The S&P is up almost 17% from this week a year ago. In 2013 it increased 30%. In fact, the market is now fully a third higher than it was back in the pre-crash days of 2007. More than $15 trillion has been added to US equities, and the gain since the low point in March of 2009 is a staggering 193%. And while the TSX was relatively lackluster last year (up just under 10%), so far in 2014 it’s ahead 14%, with the 12-month gain now running over 26%.
This all means US markets (which set the tone for most others) have not had a correction of 10% for almost three full years – since the American debt ceiling crisis of 2011 (when gold peaked). This is abnormal, to say the least. On average, corrections have gripped markets every 18 months since way back in 1946. That would suggest we’re way overdue.
But these are not normal days. By any stretch. Interest rates have been at emergency levels now for almost five years. In fact, Europe is battling deflation and rates may go negative. The US Fed has been spending billions a month buying bonds with wealth it created, to keep money costs down and the system flush with cash. Corporations have amassed record levels of capital, and been using it for an orgy or mergers and acquisitions – $1 trillion in new deals this year alone.
US unemployment has plunged from over 10% to barely over 6%, with more than 200,000 new jobs every month for the last half-year. House prices, decimated 32% in the American crash, have risen on average 1% a month for more than a year. Inflation’s been tame, while markets soared. Investors have been able to borrow at 3% and earn 14% – which explains a record surge in margin debt. Demand for bonds, thanks to government stimulus, has pushed yields down and prices up. Suddenly everything looks expensive, but how can you walk away from gains like these? To invest in a 2% GIC? Pshaw.
But are markets overvalued?
Yup, stock indices are at record highs, however expressed as a multiple of corporate profits, things look a lot less scary (with one exception). The S&P is now at just over 18 times earnings, which is the highest in four years, but still miles below the 30 level reached during the height of the dot-com nonsense back in heady 2000. That was a prelude to the market losing half its value over the next couple of years.
It seems investors never learn some stuff – like speculating in companies which are cool, but don’t make money. Internet stocks as a group, for example, are at 72 times earnings on the Dow. (Facebook, Amazon and Netflix are all above 90 in price/earnings ratios. Yikes.). Besides social media companies, which are obviously in a hipster bubble, biotechnology stocks have been trading at more than 500 times earnings – which is why this part of the market (and the tech-heavy Nasdaq) have been whipsawing around most of the year, falling 20% in the spring before recovering.
So, let’s hope you haven’t built your entire portfolio on Twitter.
But apart from trendy, flaky companies, how much fear should you feel?
Probably not that much, if you stick to buying the indices and achieve lots of diversification with US and Canadian large cap ETFs, for example. The American economy holds out opportunity for lots more growth over the next few years, plus major corporations have paid down costly debt, become more efficient (that’s why unemployment shot up) and expanded their markets. In short, they learned what people buying houses in East Van did not.
Of course markets will correct, but when is unknown. By historic valuations, the S&P is about 12% too expensive. But then (as I said) these are not normal times. Inflation is tame. Rates are extreme. Companies are making money. Central banks are vigilant. Even events like MH17 and Gaza don’t seem to matter much. So expecting a badass move down may be unreasonable.
If you have a balanced (40% safe stuff, 60% growth assets) and diversified (ETFs in Canada, US and abroad, large and small cap) portfolio, a 10% or 15% dive for stocks will be a piffle. If you’ve been sitting on dead cash, then it’s a time to buy.
Of course, most people won’t. They’ll sell. But then, they read the Globe. Losers.