(except yours is more informed and better stated).
I would be very interested in your ideas on Rich’s take on the situation:
[quote=Rich Toscano] when you buy stocks, you are buying a VERY long-term stream of earnings. Like, decades. This recession looks to be very severe, but it is short term by its very nature (at some point we contain the virus, or everyone has gotten it… this can’t go on for all that long).
So as bad as this recession may be, it’s hard to see it moving the dial all that much on the DECADES worth of earnings that determine what stocks are actually worth.
I should note here that I think the US stock market started out very overvalued, which complicates things. But assuming stocks were starting out reasonably valued (as many international stock markets were, imo) — then I think a 30%+ decline is a huge overreaction.
Whether the stock downturn gets worse before it gets better, I have no idea. But I think there’s a good chance that several years hence, people will look back at this as having been a good time to be investing in what everyone else was panicking out of. (Again, assuming it hadn’t started out very overvalued to being with).
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).
