FIVE THINGS YOU SHOULD KNOW
INSIGHTS for INVESTORS – The Bubble That “Never” Pops
The question on many investors’ minds these days is “is the stock market in a “bubble”?”
The more important thing to ask oneself is “is that even the right question?!”
Markets of course move up and down, and corrections (a drop of 10% or more) happen on average about every 18 months. The problem is many people assume “on average” is the same as “on time” and that the market acts according to some kind of schedule. There’s also a lot of subconscious application of the old axiom of “what goes up, must come down.”
However, as we discussed back on January 8th of this year, the market doesn’t have to do anything and in fact often acts the opposite of how one would expect.
Our concerns are less about “bubbles” than they are with investors:
To those of you who are worried about bubbles and can relate more to the mindset reflected in bucket “c” above, we wanted to highlight a few key points to hopefully help you “keep the faith” or at least “stay the course” along with a discussion regarding why the nearly ever-present reality of inflation must be addressed as well.
Bubble Talk Isn’t Real Analysis
First, understand that “bubble” is not any kind of truly measurable or knowable piece of analysis. It’s mostly for pundits and the media to throw about to garner clicks and views. To the degree that people will talk about equity valuations their “analysis” usually fails for a few key reasons:
On this last point, Goldman Sachs recently noted that “(t)he S&P 500 has recovered 70%+ from its March 2020 low. While investors may be concerned about staying invested following the strong rally, history suggests that there is more room to run. During past US economic expansions, investors have enjoyed positive one-year returns 87% of the time, and >10% drawdowns only 4% of the time.”
Bespoke spoke to this same reality with this stat, “Of the five prior breakouts to new highs, the S&P 500 went on to rally anywhere from an additional 2.3% to 10.8%. Averaging all five prior periods together, the average spread between the prior high and the next high was 7.8% and the median gain was 8.5%. Applying the average and median gains to the current period would equate to a level of about 4,170 on the S&P 500. Obviously, that doesn't guarantee anything about the current leg higher, but we think it helps to provide a blueprint for what has been 'typical' in this current market environment.”
Bubbles Don’t Pop When Growth and Inflation Are Accelerating
Risk assets (stocks, high-yield bonds, real estate etc.) feed off of growth and inflation. True this don’t go up forever, but you’d be hard pressed to ever find a time when risk assets sold off for a sustained period when both of these components were trending upwards as they are right now.
Not only is global GDP trending upward off of the COVID shutdown lows, but earnings per share growth and the CRB commodities index are up 25% and 20% respectively in just the last quarter! Those are big numbers.
About that Inflation, It’s Hunting You
I get it, many of you are scared. As always there are some menacing unknowns out there, we are all still reeling from this COVID saga, and all you hear in the news is about the next crash.
People tend to fixate on the stock market as their gauge for all things investing and while there are some good reasons for this, the primary one for the press is that is creates the most “newsworthy” events.
The result for many is that they panic and try to time the markets by heading into cash in anticipation of the next crash. I’ll spare you today all the stats that show how misguided trying to time markets is, but you need to keep in mind the true ever-present lurking monster that almost NEVER relents … inflation!
While heading to the sidelines and tucking your hard-earned savings in the proverbial mattress might sound safe, the reality is that it is actually a GUARANTEED way to lose money over time due to inflation constantly reducing one’s purchasing power.
This has never been truer than it is today, with interest rates for savings and CD’s still far below current inflation levels that are only picking up steam.
I’ve shared another great article by Brian Wesbury below, and the current situation with inflation that is a wonderful and quick read.
Don’t let the talking heads mess with you. The truth is as a well-diversified investor with a solid financial plan you have little to worry about so long as you don’t do anything extreme. Whether you want to readdress your plan or just talk, we are always here for you.
Have a great holiday weekend!
Tim and the team at TEN Capital