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Fears of a market peak are reemerging. Investors and even advisers worry that macro trends like an aging demographic will plague the markets as retirees shift money out of stocks and into income-focused vehicles for retirement. Change is unquestionably upon us—but I believe in a much different and much more profound way.
A Deep Dive into the Data
The past few years have posted great stock returns, with the S&P 500 up 30 percent last year and 215 percent since its March ‘09 bottom. Corporate profit margins are near all-time highs, and we haven’t had a +10 percent pullback in nearly two years. Many believe the best returns are behind us.
Sooner or later things have to come back down, right?
Not so fast. Despite recent gains, the level of equity ownership among retail investors is at a 50-year low, and it’s at a 30-year low for institutional investors. Historically, bull markets end on euphoria and extreme overvaluation—neither of which is present today. U.S. stocks are trading at a price/earnings value of ~15.3, slightly above the 10-year average of 13.8 and still below the 25-year average of 15.5. The CAPE, or Shiller’s P/E Ratio, tells a similar story: It’s currently at 24.9 versus the 10-year average of 22.9 and in-line with the 25-year average of 25.0. Many international sectors are trading at even larger discounts.
Remember also, that we’re in a record-low interest rate environment, even as the Fed continues its tapering strategy.
In other words, the alternatives to equities are not terribly appealing in my view (i.e. a ~2.5 percent 10-year yield on a U.S. Treasury, or underperforming commodities like gold). I also believe the macro trends point to lower rates (and inflation) for longer than most believe. That means retirees will likely need to gravitate to stocks for more total return potential to fund retirement, in my opinion.
The backdrop to this is improving U.S. economic data in areas like employment, auto sales, trucking surveys, bank loan volume and rail-car loads. What is different this year is the synchronized global growth as areas like China and Europe show more improvement. But that’s not all. Entrepreneurs and private-sector innovation are reshaping the global landscape at a pace never seen before.
An Unknown Future
The fact is, it is impossible to know what’s in our future. Technological innovations, agricultural advances and other social changes that are difficult to foresee will shape our future in unpredictable ways. Yes, there are uncertainties, but I believe our future is bright.
What if, in the very near future, you could go online and buy a pair of shoes, sunglasses or a new microwave and print it at home using your very own 3D printer? What if your home was completely self-sustaining? As solar technology improves, clunky solar panels could be replaced with a much smaller and more powerful solar antenna that could run your entire home without power outages or hefty utility bills.
Think global population will ruin the earth and deplete our resources? I say, think again. Scientists have developed ways to feed entire cities like Chicago and New York by farming and producing food from one single abandoned building. It’s called vertical farming and I believe it’s the wave of the future.
While these technologies are still in the development stage, it shows that we are creating ways to live longer on less and recycle more efficiently than ever before.
Markets and economies go through cycles and that’s exactly what we’re in now. By many measures, this is very similar to cycles experienced over the past 100 years. Could there be a 40 percent market pullback tomorrow? Sure. No one knows for certain (even though many claim to). But you can’t plan for that.
Behavioral science shows that investors’ biggest downfall is letting emotion dictate their investment decisions. Well, take this article as a reiteration to stick to the facts. In my opinion, massive corporations and even industries are going to become obsolete in a few years’ time as others emerge as powerhouses. Entrepreneurs and small businesses are making progress in days, weeks and months’ time that was not possible to do in several years. Just imagine what this will do to the investment landscape …
The biggest risk people face right now in my view is to not participate.
Matthew D. Pappas is a financial adviser with the Cottonwood Group of Wells Fargo Advisors LLC, a wealth management team with offices in Salt Lake City, Park City and St. George. Its website is cottonwoodgrp.com.
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