Bill Gross's Investment Outlook For July 2014: One Big Idea Some may, and will, argue. But my take is that all of this New Neutral is a re-constituted version of a lot of PIMCO's New Normal from a few years ago. Back then, the view from PIMCO was that stocks would return fairly low single digits, which is what this pseudo-new view suggests. And bonds will do slightly less than stocks, with less volatility, which just happens to play into PIMCO's hands as the world bond gurus. I do not necessarily disagree with the premise, nor the reasoning behind it. But I suspect that, just as New Normal had umpteen revisions and editions, New Neutral will evolve, too. Then again, PIMCO's leader may change the company's outlook and come up with a NEW 'new' next year. So nothing really new here. We have all been wondering what will happen when the Fed takes away the punch bowl. The scenarios have been all over the place. Mr. Gross' take is pretty benign, but it assumes the Fed follows his newest NEW economic analysis.
Other well-respected folks think the Fed has already waited too long and will be forced to raise rates much faster than anticipated, perhaps as much as 50-100 bps at a time. Now THAT would certainly step on Mr. Gross' tail! Since my economic crystal ball is in the shop, and since I am not prescient enough to be able to foretell the future, my take is to remain nimble, flexible, and to not be greedy, either with bond yields or with stock allocations. Most of our clients are more fearful of losing principal than they are of missing out on more stock market gains. There are always a few who want to join the part when the majority of people have started to exit, but that is just the nature of personalities. Is the party over? Probably not, but it seems unlikely the good times can last long, once the Fed removes the punch bowl.
How Expensive Are Stocks ? (Not Terribly)
Yes, the current P/E ratio and/or the CAPE ratio are currently a tad (that’s a scientific measure) on the high side relative to long term averages. But these signals, which according to a Vanguard study do provide a 20-30% explanation of market price movements, are not sufficiently above the norm to likely generate negative equity returns for the upcoming decade.
They are not in the worrisome zone yet, but warrant some watching.
Based on current values and historical average data, I expect stock dividends to yield 2% annually, productivity gains to yield a 2% gain, demographics to enhance returns by 1% annually........
Adding these factors together projects an expected 10-year positive 7% annual equity reward.
1. What is your thinking regarding expecting "demographics to enhance returns by 1% annually....."? One of the biggest demographic issues in the U.S. is "The Graying of America", the aging of America. Substantial numbers of baby boomers retire every day, reducing the overall GDP and productivity, which in and of itself as a factor decreases the profits of corporations. What are the demographic trends you think will add to stock returns going forward?
2. Re: "according to a Vanguard study do provide a 20-30% explanation of market price movements.
Do you have a reference to this study, or link/URL? I'm not doubting what you are saying, but would like to read it
3. Re: 'the current P/E ratio and/or CAPE ratio a tad on the high side relative to long term averages....not in the worrisome zone yet'
James Montier is a key member on Jeremy Grantham's GMO team, who write their monthly stock market 7-year forecast. The Shiller CAPE is a significant factor they consider.
James Montier does not agree that the Shiller P/E is a tad high. He says it is exceedingly high.
In this interview from May 1
5, 2014:
http://money.cnn.com/2014/05/01/pf/stocks-overpriced.moneymag/index.html?iid=SF_M_Riverhe is asked:
Interviewer: "Are stocks overpriced?"
James Montier: "There is no doubt that the U.S. stock market is exceedingly overvalued."
Interviewer: "What makes you so sure?"
James Montier: "The simplest sensible benchmark is the Shiller P/E. Right now we're looking at a broad index like the Standard & Poor's
500 trading at something like 26, 27 times the Shiller P/E. Fair value would be 16 or 17 times historical earnings."
How Expensive Are Stocks ? (Not Terribly) @Charles, I know you are a big Meb Faber fan, who in his book Global Value places a great deal of importance on the Shiller CAPE. Meb Faber obviously thinks the Shiller CAPE should play a big role in our investing decisions. The referenced chart shows the Shiller P/E to have averaged 2
5.1 for the past 2
5 years. How then do you think investors should use the Shiller P/E in their investing decisions?
How Expensive Are Stocks ? (Not Terribly) The S&P 500 forward 12 month P/E they are using from JPMorgan is 15.6
That seems too low based on Morningstar and the WSJ
The WSJ shows a forward P/E of 16.74
Morningstar shows a forward P/E of 17.01 for the S&P 500 in their portfolio data for VFINX, and 17.42 in their portfolio data for SPY and IVV
At any rate, the difference between the JPMorgan forward 12 month S&P 500 P/E of 15.6 and Morningstar's 17.01 or 17.42 seems significant.
Their conclusions might have been different had they used a higher P/E
Less Stupid Investing Hi Guys,
I want to thank you all for your thought provoking and pithy replies. Yes John Chisum, I did intend to say pithy. Sorry about my defective spelling. I hope that’s not an early signal of defective investment thinking.
Scott, I have made a practice of purposely not discussing my portfolio holdings or of recommending specific funds because I do not believe in a one-size-fits-all-purposes philosophy. I even abstain from making specific recommendations to my immediate family members. Decisions like this are a very personal matter. Everyone is more likely to stay the course when rough patches are encountered if he alone owns the decisions.
For what its worth, I initially invested in individual stocks in the mid-1950s. I was not particularly successful, but continued to do so until the mid-1980s. I suspect I played a small role in a wealth transfer operation. A large part of my savings ended in the pockets of stock brokers.
In the mid-1980s, my first mutual fund adventure was with Peter Lynches’ Magellan fund. Before investing with him, I naively telephoned and actually spoke with George Soros. He politely informed me that I was not a qualified candidate client. I sold Magellan after Jeff Vinik was released for making an untimely and uncharacteristic losing bond wager.
From that time until about one year ago, I held mostly actively managed mutual funds. For example, I was an original investor in the Masters Select Equity fund. I believed in the concept of a concentrated portfolio to make a meaningful wealth impact, and in a carefully designed and executed manager selection and monitoring process. Results were marginally acceptable until my recent epiphany. Any marginal benefits from active fund management are accidental (with a few noteworthy exceptions) and are not worth the effort.
I am in the process of converting my portfolio into one with a passive-to-active mix of about 80-to-20. I have held positions in balanced fund stalwarts DODBX, VWINX, and VWELX since the mid-1990s and plan to retain them. When I sold Magellan, I transferred my holdings equally into FCNTX and FLPSX. I plan to retain a reduced percentage in these positions. I am expanding my Index positions in an incremental manner.
That’s as far as I’m willing to go. I consider myself a very pedestrian investor. I do NOT recommend that anyone duplicate my portfolio. My comfort zone or needs are surely not anyone else’s comfort zone or needs.
As far as I can remember, I have never made fund recommendations in any of my MFO postings. If pressed on this issue, I have consistently punted and recommended other (like Scott) MFO members to carry the ball. You guys are surely more prescient and more up to date on this matter than I am.
Basically, I’m slowly retiring from the investment world.
I really want great success for you guys in achieving whatever investment goals you define.
Thanks again for contributing to this spirited discussion.
Best Wishes.
Less Stupid Investing As to the first law noted above: "First Law of Financial Conferences"....hell, from my expericences and observations, this is how human beings function in many cases....period.
I can only confirm that after my 60 plus years on this planet, that I am fully assured that my intuition (the summation of all my experiences combined with my original DNA) provides for reasonal investment returns that in most cases, year after year outperforms at least 5 percent of the active fund managers and the majority of hedge funds.
And of course, I am much ahead of the 99% of folks who don't care or don't know about investing.
What more could a person ask for; in spite of the original expression of this thread.
What a lucky fellow I am.
End of story.
Signed: Smart Ass
NOTE: perhaps an equity buying chance coming our way near term; after some of the selloff smoke clears.........well, at least if the machines don't jump back into the game too soon.
Regards,
Catch
