Though, according to many “market professionals,” it poses little risk to the longer-term health of the stock market. According to one highly respected trust company: “We anticipate that these market impacts, as well as those associated with any likely retaliatory action, will be modest and short lived…”. We would like to share with you our somewhat different perspective on the financial impact of recent events.
The bullish fervor leading into the new year was not without merit. For “risk” assets such as stocks, good news has been plentiful: Impeachment at this point has been a market nonevent; Phase 1 of a China deal is “totally done”; most Democratic nominee polls have more moderate, former Vice President, Joe Biden leading over candidates considered less market friendly; the Federal Reserve is unlikely to raise rates in an election year; and regulatory and tax reform have helped reprice the stock market indices. Major market news- up until the military strike- has been predominantly friendly and the market momentum and psychology clearly positive.
However, sometimes, a series of unexpected data points, surprise developments or an exogenous event can trigger a change in market psychology. These types of events can be more troubling when market valuations, like today, are pricing in an abundance of good news. 2020 may be the year where patience and opportunistic investing play a welcomed role in investing.
We encourage all investors today to give thought to prudent diversification and search their portfolios for timely rebalancing opportunities. By most measures, the large cap segment of the U.S. market trades at an above average 19x anticipated earnings, while European markets trade at closer to an historical average of 14x, and emerging markets even less. Obviously, reversion to the mean for price earnings multiples is never a guarantee or by itself should it be a standalone strategy. Let’s remember, however, as the decade ending 2010 dramatically proved, the investable market universe should extend beyond our home borders. In that decade, emerging market and international stocks greatly outpaced U.S. markets rewarding those that invested outside any home bias.
Concentrated investing, either knowingly or unknowingly, is an increasing trend as select mega cap stocks have grown tremendously in value. As an example, three mega cap stocks make up over one third of the weighting in the popular QQQ Index. History (as well as the law of large numbers) suggests it can be difficult for any one company or sector to deliver consistent outperformance when their respective market values begin to dominate their fellow index constituents. If your portfolio or fund holdings are overweight recent winners, it could be time to consider some profit taking. Of course, market excesses can exceed almost anyone’s expectations and can only be confirmed with perfect hindsight. Though, we would add, the adage “past performance may not be indicative of future results” seems to outlast every investment cycle, and for good reason.
We are believers in long-term investing but remain somewhat skeptical that price earnings multiple expansion and above average earnings growth will have the same impact on U.S. stock prices in this new decade. According to Credit-Suisse, the annualized S&P 500 earnings per share (EPS) growth rate for the decade ending December 31st, 2019 was 10.2%, roughly 2x historical average. Historically, once EPS growth rates peak from such levels, they decline dramatically the following decade. It’s fair to anticipate this will be a different decade with its own set of surprises. And perhaps there will be different sectors and individual securities that will lead us to greater highs in the market.
The fear of military escalation should at a minimum give us pause to reflect upon current investment strategies and holdings. Now may be an ideal time to assess whether your portfolio remains aligned with your goals and acceptable level of risks, possibly putting you ahead of the masses. As clients and friends of Withum, we are happy to offer you a complimentary portfolio analysis to anyone interested.
Wishing everyone good health and fortune in 2020 and beyond.
Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Withum Wealth Management. [“WWM”] or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article/newsletter serves as the receipt of, or as a substitute for, personalized investment advice from WWM. Please remember to contact WWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. WWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the WWM current written disclosure statement discussing our advisory services and fees is available for review upon request.