Where are we today?

Where are we today?

We still are, in one of the longest bull markets (markets are rising as opposed to bear markets where shares go down) in history. This thanks, to low inflation, sinking interest rates, TINA (= There Is No Alternative), quantitative easing (= money printing) and a business friendly environment in the U.S.

2020 has been a historic year. One for the history books. Several Stock markets started the year, near an all-time high. Then came the corona crisis and markets crashed in a record time around 30% or more with the deepest point around mid-March. As from that point the markets made a sharp recovery and the MSCI ACWI index is almost back at its level of the start of the year. Some indexes like the technology dominated NASDAQ have even reached an all-time high. Other indexes, like most of the European indexes which have more industrial and financial shares, still have some ground to cover in order to reach their pre-corona level but still here also the recovery has been impressive. Example: the Belgian BEL-20 index has gained 10% in the single first week of June.

Is it now too late to step in the market? Well it depends on your financial position. If you want to start investing, please proceed but do not rush and remember to diversify also in time. So do not shoot all your ammo (cash) in one go. In the long run there have been few periods where stocks gave a negative return over a period of 10 years. These periods were in the thirties and the seventies of last century and briefly around the financial crisis of 2008 but this did not last very long and 2009 proved to be the start of a very long bull run.

But with a diversified portfolio, including gold, you could probably even avoid these 10 year negative periods.

If you already have a considerable portfolio then probably it will pay to become somewhat careful and not to commit too much cash at current levels. Later in the year a 10 to 15% correction or even bigger, could be very likely. On 17 March the end of the world was priced in, now a V shape recovery of the economy, after the corona panic, appears to be priced in.

I do think that there will be a lot of “relief spending” from consumers once the nightmarish fear for the virus will disappear. Many people will want to go travelling and enjoying their life so the economy will probably re-bound fast. In addition, a lot of the money central banks have been creating out of thin air and, together with money from government stimulus programs, will find its way into the markets. More money chasing the same quantity of shares.

Quantitave easing (= money printing), together with artificially low interest rates are the main reasons why stock markets have increased in past years faster than the growth levels of the real economy.

Low interest rated result in savers not having any viable alternatives to stocks but also in a re-rating of current share prices. This is a bit complicated but I’ll try to explain it in a simple way.

When you buy a share, you pay for the current value of a company and for what a company is currently earning in profits and cash flow but also for expected future earnings. This is in particular important for the valuation of growth stocks where the future earnings are expected to rise. Now, a euro that a company is expected to earn in 5 years is not worth the same as a euro today because inflation diminishing the value of the euro to be earned in 5 years. When now inflation diminishes, as it does now during the corona panic, (consumers are not spending, so lower demand against a production capacity that stayed more or less intact) then the euro or dollar that will be earned in 5 years increases in value and thus the current valuation of the share goes up.

Still, growing tensions between the US and China, the US presidential elections and the possibility that the virus would re-appear could cause a retreat of the markets. The current P/E of the US market is in the top 10% of its history whilst the US economy is in its worst 10%. So there is not a lot of margin for bad news. 

After the technology shares, which are the obvious winners of the corona crisis, now also value shares seem to catch up some of their arrears. (A value stock is a stock that trades at a low price relative to its fundamentals, such as dividends, earnings, or sales. Although value stocks historically give a higher return, they have now been lagging growth stocks since 2006.)

Is this the end of the fenomenal outperformance of the growth stocks and are value stocks going to catch up? In the US, Russell has created two indexes, one for value (Russell 1000 Value Index) and one for growth (Russell 1000 Growth Index). On 27 May 2020 growth stocks were up 1.8% this year and value stocks are still down more than 16%. The under-valuation of European value stocks is even higher than this of US stocks.

US growth stocks have a very high P/E (P/E = Price/earning = the stock price divided by the earnings per share, thus the higher the figure, the more expensive the stock) of 26.36 against value stocks at a more affordable 16.38. So a catch-up of value stocks is possible but do not switch your entire portfolio around because there is a good reason why growth stocks have outperformed value stocks. Technological innovations will still dominate the world for years to come and value stocks will suffer from the implications of an ageing population and thus less consumption in the West and Japan. 

So, above all, diversify. The average return of the Belgian index between 1998 and 2018 was 2.9% per year. That was hardly compensating for inflation. Do not forget that in the period 1966-1986 the inflation-adjusted, average return of the U.S. stock market was less than 2%. You are counting on some extra revenue for travelling during your pension time? Fancy waiting for 20 years on a bench in the park with a can of beer from Aldi and a book from the library?

As for buying bonds, as a diversification to stocks, I would advise against it. In Belgium, but similar in most western countries the interest you receive on a 10 year government bond is negative. This means you put your money at the disposal of the government for, let's say a 10 year period and for the privilege you also need to pay the government. The losses caused by inflation and eventual wealth taxes, to be added to this negative return. You must be out of your mind to do this. Bonds of private companies and emerging markets can still give you a positive return but buy these by means of an ETF as the risks involved in buying individual bonds are substantial and you will find it difficult to diversify sufficiently. Buying bonds from Asian countries in their local currencies looks to me as a good diversification as these currencies could rise against the euro and the dollar in coming years. After all, the West and Japan have their printing presses running day and night to print extra money and then we expect the Asian populations to work their ass off to produce for us shiny telephones, clothes, and all other products you can imagine, which we pay for with money we just print as fast as we can. Somehow, something has to give in.

I would advise you to invest part of your portfolio in gold or gold related investments. Yes the stockmarket bull can still run for a while as FOMO (= Fear Off Missing Out) drives markets further up and gold can return some of its previous gains as a lot of gold is held through ETF’s and those can be sold with one push of a button on a keyboard. But still, buying gold, preferably in coins and bars, but also shares of gold- and silver mines, preferably through ETF’s to diminish the risk of owning individual mines, seems like an excellent diversification.

Forget about the “Free markets”. Markets are dominated by the central banks. Central banks are not independent, they act like the governments expect them to act. Public debts are currently at levels unheard of and excessive debts are a brake on economic growth and lead to massive misallocations of resources.

Interest rates are zero or negative in most of the western world and that will stay so for a very long period. Rising interest rates would simply lead to most western countries going bankrupt and governments defaulting on their obligations such as pensions and well-fare payments and worst of all, politicians not getting re-elected.

This combination of zero interest rates and creation of money explains why stock markets have been booming, not because of an exceptionally thriving economy, but because of multiples expansing (This is: stocks getting more expensive) and further concentration in the market. (Example: Amazon getting bigger).

As André Kostolany said, the real economy and the stock market are like a master and his dog on a leach. Sometimes the dog runs in front of its master and sometimes it lags behind but in the end, they walk again side by side. Currently the dogs is way ahead of its master, pulling on the leach. So for the somewhat longer term I am more pessimistic and diversification in gold looks like a sensible idea.

Especially in Europe but also in the US, radicalism is on the move. Investors are perceived as thieves and the conviction, that taxing and confiscating wealth, instead of studying/working/saving/investing, will lead to prosperity, is progressing.

In the west I see too much complacency and belief that we were all born with a golden spoon in our mouth, to feel comfortable about the years to come.

A return to the seventies, were loony left socialism was rampant, unions almighty, pessimism widespread and the economy was stagnating, is likely. Western liberalism and capitalism are under fire from mainly very left wing dominated media. In emerging markets billions have been lifted out of poverty since through globalization and free markets but in the west, fear of losing privileges dominates the minds of a lot of people. I miss the “can-do” mentality that I saw during my travels in Asia. Helmut Schmidt and Margaret Thatcher, must be turning in their grave.

The seventies were a disastrous era to invest in the markets. Stock markets lost more than 50% of their value.  Inflation was out of control and in double digits. Savers could receive a 5% return on a savings account but were still not making up for inflation, by a long stretch.

Only diversification, partly in gold in gold could keep your return positive in such a scenario. In particular if inflation were to pick up.

But although currently, deflation seems to be more of an issue than inflation, nobody knows how the experiment of the central banks is going to turn out. Here we are in un-chartered territory. Rising prices following de-globalization, rising taxes, wages and social benefits increases, not compensated by a growing productivity, together with exploding money supplies could very well lead to a hyperinflation in the coming years. It would certainly please some governments, as public debt would be inflated away. Inflation is a tax on savers that voters usually do not blame on politicians.

So, whilst the current bull market can still go on for a while, fueled by the central banks, it could also end in the next couple of years, and give way to a long-stretched correction in which Western societies are going to have to get their act together again, as they were obliged to do in the eighties. This in order to eliminate imbalances, pay back unsustainable debts, reduce public spending as compared to the GDP (= Gross Domestic Product, meaning the value of all goods and services produced in a given country in one year) and, above all, explain to the population that in order to harvest, you first have to sow.

My conclusion: Yes, you have to be invested but keep come cash on the side and diversification, in different investment products and also geographically, is more important than ever.

Disclaimer: I would like to remind you that the data contained in this mail/table is not necessarily real-time nor accurate. All information comes from various websites and other sources, so figures may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for investment purposes. Therefore I do not bear any responsibility for any losses you might incur as a result of using this data.

I will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts or opinions contained within this mail/table. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.