I will bet that if you were given the odds of making money, 90% of the time you would take that bet. Just think of that possibility. You would have the odds of making money nine out of every 10 times you placed a bet. Who could really ask for better odds?
I use that analogy to reflect on the fact that the stock market, as measured by the S&P 500, has been profitable in nine of the last 10 years. The only loss year was in 2008 when it lost 37%. Yet, every day I hear clients say that they are scared of the market because of 2008, not realizing how many years the market has been profitable. In fact, if you go all the way back to 2003 the market has only been down one time in the previous 12 years. It always amazes me how poorly informed investors are when it comes to these facts. If given the odds that you will only lose money one out of 12 times, virtually every investor (even a conservative one) would take that bet.
Just for the sake of argument, I started asking clients how many times they thought the market was up over the last decade. I got answers from two to three, and the highest one I received was six; yet, the market was up nine times in the last 10 years, but virtually no one knows it.
Before I go on my rant about why stock prices should be going up at the current time, I do have to report on the month of September, which was negative all around. For the nine months ended September 30, 2015, the S&P 500 is down 5.3% for the year and down 0.6% for the one year period ended September 30, 2015. The NASDAQ composite is down 1.6% for the 2015 year but is up 4% for the one year period then ended. The Dow Jones industrial average is down 6.9% for the 2015 year and down 2% for the nine months then ended. The Barclays aggregate bond index is up 1% for the 2015 year and is up 2.8% for the 12 month period. There is no question that the months of August and September have been very negative. For the two month period the S&P is down 8.7%, but it seems a lot worse than that, given the volatility on the market.
For those of you who have not heard, Danielle and Robby (both of Rollins & Van Lear/Rollins Financial, Inc.) welcomed their precious baby boy into this world on Monday, September 28, 2015. Everyone, say hello to Patrick "Reid" Schultz!
I use that analogy to reflect on the fact that the stock market, as measured by the S&P 500, has been profitable in nine of the last 10 years. The only loss year was in 2008 when it lost 37%. Yet, every day I hear clients say that they are scared of the market because of 2008, not realizing how many years the market has been profitable. In fact, if you go all the way back to 2003 the market has only been down one time in the previous 12 years. It always amazes me how poorly informed investors are when it comes to these facts. If given the odds that you will only lose money one out of 12 times, virtually every investor (even a conservative one) would take that bet.
Just for the sake of argument, I started asking clients how many times they thought the market was up over the last decade. I got answers from two to three, and the highest one I received was six; yet, the market was up nine times in the last 10 years, but virtually no one knows it.
Before I go on my rant about why stock prices should be going up at the current time, I do have to report on the month of September, which was negative all around. For the nine months ended September 30, 2015, the S&P 500 is down 5.3% for the year and down 0.6% for the one year period ended September 30, 2015. The NASDAQ composite is down 1.6% for the 2015 year but is up 4% for the one year period then ended. The Dow Jones industrial average is down 6.9% for the 2015 year and down 2% for the nine months then ended. The Barclays aggregate bond index is up 1% for the 2015 year and is up 2.8% for the 12 month period. There is no question that the months of August and September have been very negative. For the two month period the S&P is down 8.7%, but it seems a lot worse than that, given the volatility on the market.
For those of you who have not heard, Danielle and Robby (both of Rollins & Van Lear/Rollins Financial, Inc.) welcomed their precious baby boy into this world on Monday, September 28, 2015. Everyone, say hello to Patrick "Reid" Schultz!
Caroline, Robby, Danielle and Reid
For this blog I decided I would focus on why the market should be up, in contrast to all the pessimism reported in the financial press. Some of the reasons are as follows, with some more important than others:
• The market is not overvalued at the current time. Numerous publications have put the estimated S&P earnings for 2016 at $130. Dividing that by the current valuation of the S&P at 1,920 the multiple to earnings is below 15. Historically, the market trades at a multiple of 17 to 18 times forward earnings; therefore at the current time the market is valued at less than historic valuations.
• As an investor, the best time to invest is when the market is down and the trading choppy. Baron Rothschild, an 18th century British nobleman, is quoted as saying “The time to buy is when there’s blood in the streets.”
• Warren Buffet, the most successful investor of the 20th Century, only had one word to say regarding the market selloff of August and September, “Buy.”
• People are not giving enough credit to the reduction in the price of oil and the reduction in the pricing of commodities. Given that the price of oil is down roughly 50% over the last year, virtually every segment of the market should enjoy higher earnings based upon lower energy costs. While it certainly does not benefit the oil companies, virtually all other sectors and the consumer will benefit by having these lower energy prices in their budget.
• The level of pessimism by investors is virtually unprecedented since 2008. There seems to be such an overwhelming feeling of despair by investors that it would seem to reflect capitulation and therefore a contrarian reason to buy. Rarely are market bottoms reached with a level of high investor optimism, but often they are met on the contrary, by high investor pessimism.
• Alternative investments to stocks are not attractive. Currently, cash is paying close to zero and real estate is not getting normal appreciation since there is a lack of inflation. Precious metals have been in a downward trend for years and bonds do not offer the protection of a loss of principal, given that we are anticipating interest rates are going up. Therefore, at the current valuations, we believe stocks are the best investment to protect you against inflation since none of the other investments offer a realistic opportunity to go up in value over the next 12 months.
• The market, as measured by the S&P 500, historically goes up in value roughly 8 years out of 10. Contrary to popular opinion, the S&P 500 has been up 9 out of 10 years from 2005-2014. The only year that the market was down in the last 10 was in 2008, when it lost 37%. Given the historic average of the market being up in 8 out of 10 years, the fact that we have had 9 out of 10 profitable years, a pullback is not unexpected.
• The U.S. economy continues to be strong. Just this week it was announced that the second quarter GDP in the United States at 3.9%, which is very strong. In addition, there are 2.3 million Americans working at the current time that were not working this time last year. Unemployment is at 5.1%, which is near the historic level of 5% that economists use as a gauge for full employment.
• The housing industry in the United States has recovered nicely but is still not at 2007 levels. Housing construction is up in all regions of the United States and consumer confidence index is now near the 100 level in the United States.
• Much has been said about the potential of an earnings decline in the third quarter of 2015, but that is only due to the dismal earnings from the energy companies of the S&P 500. If you did not include energy companies, the S&P earnings would set a new all-time record in the third quarter of 2015. Even if you factored in that decline for energy companies, the decline in earnings would only be a few percentage points off of the all-time high ever earned by corporate America.
• Much has been said about the slowdown in China, but in fact, the slowdown in China is relatively minor. Last year, GDP was measured in China at roughly 7%. Very few are forecasting a GDP in China of less than 6% for 2015. While there certainly has been a decline in the growth in China, they are still experiencing one of the highest growth rates in the world. And more importantly, exports to China represent less than 1% of U.S. GDP.
• Bear markets tend to occur when the United States falls into recession, such as in 2008. As mentioned above, the GDP was recently announced at 3.9%. It appears that for all of 2015, the GDP may actually exceed 3%. There are very few forecasting a recession in the United States for at least several years into the future. The likelihood of a bear market in an economy growing at 3% would be virtually unprecedented.
• The wild fluctuations in the market have a lot to do with the ease of trading ETFs, which in many cases are leveraged multiple times to their underlying value to the stocks. Given that the indexes can be easily traded with one ETF, there are large fluctuations in value based upon traders’ manipulation of these popular investment vehicles. By virtue of trading an ETF in a specific sector, all stocks of that sector are traded either up or down. Unfortunately, individual stocks are not isolated for trading, but rather the entire sector is traded. This creates high volatility by traders who use leverage to obtain a movement in the market with a minimal amount of capital. Momentum traders work either up or down until the trend is broken. In recent months, since the trend has been down, momentum players have exaggerated the movement by trading leveraged ETFs of the major market indexes. In prior years, these trading vehicles were not available to the average investor.
• Car sales have picked up nicely and are projected to finish up 2015 with 18 million unit sales this year. You may recall during the height of the financial crisis when car sales in the United States fell to only 12 million. The significance of this pickup in car sales is that hundreds of thousands of people work in the car industry. While certainly many are employed by the car companies themselves, the majority are employed in the companies that provide parts and services to the car industry. The manufacturing of cars in the United States is a huge contributor to positive employment, and the fact that car sales are moving toward all-time records is extraordinarily important for both employees and the companies that represent the car industry. Also, cars are a true reflection of consumer confidence. If the consumers did not feel confident, they certainly would not be purchasing new cars and agreeing to finance over the long-term for their automobile purchase.
• Personal income in the United States has been growing at 4% or better annually since March of last year. When personal income is growing, there is an expansion of spending on housing, automobiles and other luxury items. Since roughly 70% of the U.S. GDP is dependent upon consumer confidence and consumer spending, that bodes well for the future economy. As long as the consumer stays healthy, so should the U.S. economy. With full-employment almost reached in the United States and the consumer sentiment index near 100, it would not appear that GDP is in danger over the short-term.
Quite frankly, I have no idea where the market is going next week or the week after, or nine months from now. However, I know with absolute certainty that the market will be higher five years from now, 10 years from now and 20 years from now. It has always baffled me why people are so concerned about what happens on the market on a day-to-day basis. It really has little impact in the long-term horizon of investing. Traders must make money, and in order to make money, they must move the market. That is the difference between traders and investors. We, as investors, should not even consider the wild fluctuations and high volatility you see on the markets these days.
In this business we like to say that, “you have to look through the clouds in order to see the sun”. I do not invest based upon public sentiment. I invest based upon facts. The facts above clearly illustrate that there is a high likelihood you are going to make money being invested, and we absolutely know you will not make any if you are not invested.
As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
• The market is not overvalued at the current time. Numerous publications have put the estimated S&P earnings for 2016 at $130. Dividing that by the current valuation of the S&P at 1,920 the multiple to earnings is below 15. Historically, the market trades at a multiple of 17 to 18 times forward earnings; therefore at the current time the market is valued at less than historic valuations.
• As an investor, the best time to invest is when the market is down and the trading choppy. Baron Rothschild, an 18th century British nobleman, is quoted as saying “The time to buy is when there’s blood in the streets.”
• Warren Buffet, the most successful investor of the 20th Century, only had one word to say regarding the market selloff of August and September, “Buy.”
• People are not giving enough credit to the reduction in the price of oil and the reduction in the pricing of commodities. Given that the price of oil is down roughly 50% over the last year, virtually every segment of the market should enjoy higher earnings based upon lower energy costs. While it certainly does not benefit the oil companies, virtually all other sectors and the consumer will benefit by having these lower energy prices in their budget.
• The level of pessimism by investors is virtually unprecedented since 2008. There seems to be such an overwhelming feeling of despair by investors that it would seem to reflect capitulation and therefore a contrarian reason to buy. Rarely are market bottoms reached with a level of high investor optimism, but often they are met on the contrary, by high investor pessimism.
• Alternative investments to stocks are not attractive. Currently, cash is paying close to zero and real estate is not getting normal appreciation since there is a lack of inflation. Precious metals have been in a downward trend for years and bonds do not offer the protection of a loss of principal, given that we are anticipating interest rates are going up. Therefore, at the current valuations, we believe stocks are the best investment to protect you against inflation since none of the other investments offer a realistic opportunity to go up in value over the next 12 months.
• The market, as measured by the S&P 500, historically goes up in value roughly 8 years out of 10. Contrary to popular opinion, the S&P 500 has been up 9 out of 10 years from 2005-2014. The only year that the market was down in the last 10 was in 2008, when it lost 37%. Given the historic average of the market being up in 8 out of 10 years, the fact that we have had 9 out of 10 profitable years, a pullback is not unexpected.
• The U.S. economy continues to be strong. Just this week it was announced that the second quarter GDP in the United States at 3.9%, which is very strong. In addition, there are 2.3 million Americans working at the current time that were not working this time last year. Unemployment is at 5.1%, which is near the historic level of 5% that economists use as a gauge for full employment.
• The housing industry in the United States has recovered nicely but is still not at 2007 levels. Housing construction is up in all regions of the United States and consumer confidence index is now near the 100 level in the United States.
• Much has been said about the potential of an earnings decline in the third quarter of 2015, but that is only due to the dismal earnings from the energy companies of the S&P 500. If you did not include energy companies, the S&P earnings would set a new all-time record in the third quarter of 2015. Even if you factored in that decline for energy companies, the decline in earnings would only be a few percentage points off of the all-time high ever earned by corporate America.
• Much has been said about the slowdown in China, but in fact, the slowdown in China is relatively minor. Last year, GDP was measured in China at roughly 7%. Very few are forecasting a GDP in China of less than 6% for 2015. While there certainly has been a decline in the growth in China, they are still experiencing one of the highest growth rates in the world. And more importantly, exports to China represent less than 1% of U.S. GDP.
• Bear markets tend to occur when the United States falls into recession, such as in 2008. As mentioned above, the GDP was recently announced at 3.9%. It appears that for all of 2015, the GDP may actually exceed 3%. There are very few forecasting a recession in the United States for at least several years into the future. The likelihood of a bear market in an economy growing at 3% would be virtually unprecedented.
• The wild fluctuations in the market have a lot to do with the ease of trading ETFs, which in many cases are leveraged multiple times to their underlying value to the stocks. Given that the indexes can be easily traded with one ETF, there are large fluctuations in value based upon traders’ manipulation of these popular investment vehicles. By virtue of trading an ETF in a specific sector, all stocks of that sector are traded either up or down. Unfortunately, individual stocks are not isolated for trading, but rather the entire sector is traded. This creates high volatility by traders who use leverage to obtain a movement in the market with a minimal amount of capital. Momentum traders work either up or down until the trend is broken. In recent months, since the trend has been down, momentum players have exaggerated the movement by trading leveraged ETFs of the major market indexes. In prior years, these trading vehicles were not available to the average investor.
• Car sales have picked up nicely and are projected to finish up 2015 with 18 million unit sales this year. You may recall during the height of the financial crisis when car sales in the United States fell to only 12 million. The significance of this pickup in car sales is that hundreds of thousands of people work in the car industry. While certainly many are employed by the car companies themselves, the majority are employed in the companies that provide parts and services to the car industry. The manufacturing of cars in the United States is a huge contributor to positive employment, and the fact that car sales are moving toward all-time records is extraordinarily important for both employees and the companies that represent the car industry. Also, cars are a true reflection of consumer confidence. If the consumers did not feel confident, they certainly would not be purchasing new cars and agreeing to finance over the long-term for their automobile purchase.
• Personal income in the United States has been growing at 4% or better annually since March of last year. When personal income is growing, there is an expansion of spending on housing, automobiles and other luxury items. Since roughly 70% of the U.S. GDP is dependent upon consumer confidence and consumer spending, that bodes well for the future economy. As long as the consumer stays healthy, so should the U.S. economy. With full-employment almost reached in the United States and the consumer sentiment index near 100, it would not appear that GDP is in danger over the short-term.
Quite frankly, I have no idea where the market is going next week or the week after, or nine months from now. However, I know with absolute certainty that the market will be higher five years from now, 10 years from now and 20 years from now. It has always baffled me why people are so concerned about what happens on the market on a day-to-day basis. It really has little impact in the long-term horizon of investing. Traders must make money, and in order to make money, they must move the market. That is the difference between traders and investors. We, as investors, should not even consider the wild fluctuations and high volatility you see on the markets these days.
In this business we like to say that, “you have to look through the clouds in order to see the sun”. I do not invest based upon public sentiment. I invest based upon facts. The facts above clearly illustrate that there is a high likelihood you are going to make money being invested, and we absolutely know you will not make any if you are not invested.
As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
