Whoa, hold on. Since I wrote that passage, markets (both US and intl) are up 36%. That changes the situation considerably in terms of what the market is pricing in, and in terms of prospective returns.
To put it in perspective, if we use the historical return of global stocks (5.2% real) — we just got over 6 years’ worth of return in less than 2 months. If you assume, as I do, that markets mean revert over time to deliver something close to the historical average return over the long haul, then the prospects for future returns just got a whole lot worse.
So, my opinion on the markets now is not the same as it was then… I would love to hear Dave’s take on my take, of course, but it’s important to adjust for the fact that my take was written 36% ago. (And for the record, I know and like Dave and he’s a great investor, so I always like hearing his take!).
A second thing I want to note is that Dave is really focused here on the S&P500. There I agree completely. In my view, it came into this very overvalued to begin with, and it is pricing in virtually no uncertainty about the cv19 outcome. I am completely on board with his assessment of the S&P500.
Where we might part ways is in other risk assets. There are areas of the global stock market that — even after this huge rally — are still priced for positive long-term returns. In specific, developed intl value stocks are priced for returns that are slightly under the average stock returns — not great but ok. Emerging value stocks are priced for substantially higher than normal returns.
I know it makes things more complex but I think it’s important not to lump all stocks together. At times, you can, but this is not one of those times. The valuation spread between the S&P500 and value anywhere (including US), and between the S&P500 and international, has literally never been higher. So the prospective returns of those things are very different.
One last note. In the other thread, zk made a very good point, which I will paraphrase here: “ok maybe the underlying value of that long term income stream has not changed, but still, in recessions and other crises, markets tend to drop.” That’s a great point and I totally agree. The thing is, though… you are now in the realm of market timing. When will it drop? How much? When will it stop dropping? When do you buy back in? I don’t know. I don’t think anyone does, really, and I know for sure I don’t. This past 2+ months should show how hard that is… who was expecting a 36% rally from the day I posted that last thing? Not me, that’s for sure.
So I largely focus on fair value and the assumption that markets will get back there at some point. Because that’s what I think I have a handle on, and I have absolutely no handle on timing. (Subnote: with that said, I do think it’s fair to adjust for very heightened medium-term uncertainty as we have now. But the valuation/expected return thing is the main thing for me, and that’s what I have been addressing).[/quote]
Yeah, valuations matter… a lot. When things hit their (first?) bottom a few weeks back I actually thought prices looked pretty reasonable for the first time in several years. I even bought some bank stocks – public stocks! Me! So, very different conversation in April. I got about 25% of my allocation done and… boom… market rocketed away from me and I just thought, That’s it – I’m outta here; this is as nutso as it gets. And I sold (almost) everything. One of the few times in my life I’ve made short-term trades in public stocks. But I feel like it was forced upon me, so… such is life.
Also, in full disclosure, I bought two Asia-Pacific dividend ETFs right as the virus panic was getting started and I’m underwater in those – but I don’t plan on selling those until Asia has a silly bubble, which may or may not ever happen. I also have a few VC investments that have done much better than I thought they would fundamentally (I generally assume I’m flushing the money down the toilet), but… they’re going to need more financing in the next 12-18 months, so, who knows what’s going to happen with that. Sometimes, Great Company + Needs Cash = Toiletville.
So, I’m not 100% bearish on Everything. But I’m 90%+ bearish on pretty much all developed market stocks – especially the big, liquid ones. And very bearish on commercial and SFR real estate. And that comprises the vast majority of the risk assets in the average person’s portfolio.
This is going to be an interesting investment cycle because of the nature of the vaccine and the news, etc. This is an outlier position but it wouldn’t shock me if we didn’t see the real bottom until after the vaccine is available, as that’s when there will be no more excuses for what I think is coming. Similar to the tech bubble, until the vaccine comes out, folks can hope and dream about what the post-covid world will look like – fantasies can run wild. Post-vaccine, the truth will be revealed… a GDP hole and massive, massive leverage accompanied by impaired long-term demand. We’re not Japan, but we’re not *that* far off – it’s not completely different.
