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Jonathan Clements: We Need Stock Prices To Fall 25%

FYI: In early October, as share prices wobbled, I had high hopes that U.S. stocks would plummet to attractive levels. Instead, shares have shot higher, adding to the rip-roaring bull market that has seen stocks triple since March 20.

The long rally has done wonders for my portfolio’s value. But it also means stocks are now more richly valued—and expected returns are lower. Unless you never again plan to add to your stock portfolio, you should have mixed feelings about the market’s heady gains.
Regards,
Ted
http://online.wsj.com/articles/why-we-need-stock-prices-to-fall-25-1416100637?KEYWORDS=jonathan+clements

Comments

  • beebee
    edited November 2014
    Sounds like JC's portfolio is not very diversified. Using FINVIZ as a stock screening tool I played around with the stock performance setting in the "technical" tab.

    Of 6951 stocks listed (I'm assuming JC and I are looking at similar markets):

    1204 stocks are down YTD 20% or more in price (that's a little over 17%)
    1554 stocks are up YTD 20% or more in price (that's a little over 22%)
    This seems like a bell curve (normal) set of results. Maybe slightly positive.

    From the peak of the bell 3947 (about 57% of the total screen) are positive for the year. Of this, 2400 are up at least 10%. This fact is to my point.

    Of all 6951 stocks, 2400 or about a third performed at or above the market's long term average of 10%. I believe I've seen this fact somewhere related to active and passive funds...66% of all stocks perform at or below the markets long term average.

    This year has been pretty...average.

    source screening tool:
    finviz.com/screener.ashx?v=111&f=ta_perf_ytd10u&ft=3

  • The real jewels of thoughts regarding this article are with the 22+ comments, which are available for reading.
  • With that said I had to check it out. This little snippet caught my eye. "An interesting concept. If you're sitting on a pile of cash waiting on bargains before you invest...makes sense."

    That poster might be waiting for quite some time. Earlier this year could have been a good time. In the meantime her cash is losing value.
  • I agree with the first commenter on the WSJ page - this is not a particularly well reasoned column. Rather it comes across as a compendium of half-thought out rationales, perhaps hoping one will stick.

    He seems to put forth an argument (one of the many rationales offered) that (assuming) profits grow no faster than GDP, profits will grow slower than in the past because GDP will grow slower. This is a production-based perspective (as in gross domestic product).

    In discussing two major inputs of GDP growth, he ignores underutilization presently affecting each. Simply making better use of available resources would generate greater production growth rates than he presents.

    Productivity - an unstated assumption is that productivity will rise at a constant rate. Assuming (my assumption) that companies' production is significantly below capacity, growth could be achieved without further investment - boosting the productivity growth rate above this constant (average) rate.

    Labor force growth - He correctly cites the Bureau of Labor Statistics figure of 0.5% total (employed + unemployed) labor force growth, but IMHO that's not the right figure to use. Rather, only the employed are responsible for what's produced, not the total labor force.

    Unemployment, even at 5.8%, remains high; reducing unemployment would increase production even with zero growth in the labor force.

    He subsequently cuts the legs out from under both of his arguments, by pointing out how a large number of people are unemployed (so employed labor could grow faster than total labor), and how large a number are underemployed (so productivity could grow faster than average).

    I'm not disagreeing with everything in the column. But the writing doesn't make the case for most of the conclusions.
  • @ Jonathan Clements: If a 25 % drop in your portfolio makes you happy, I'm all for it, but not in mine. This column get an F
    Regards,
    Ted
  • Agreed, this is a poor article from a heretofore decent author.
  • @msf, concur on your analysis on the article. JC typically writes higher quality articles than this one.
  • Cheated by Diversification?

    Mr. Clements has found the enemy – and it is he.

    “The long rally has done wonders for my portfolio’s value.
    But it also means stocks are now more richly valued—
    and expected returns are lower. Unless you never again
    plan to add to your stock portfolio, you should have
    mixed feelings about the market’s heady gains.”

    All along Mr. Clements has been telling us common folks
    in his suavity-dripping manner how we should invest.
    Now he’s somewhat unhappy with his returns and uneasy
    about future returns.
    Gosh, authorial intent seems to be a tricky business.

    I’m guessing that he’s not upset by a lack of diversification,
    but rather too much diversification – wishing he had held
    more equities during this Bull Run.

    So, now he wants a 25% pullback – essentially, another chance.
    Hey, why not call for a 50% drop?

    Sorry Mr. Clements, it was your own hand that failed to meet
    your expectations (read: greed).
  • You guys are tough!
  • I agree with most of the posters on this. The market does not NEED to drop 25%. Indeed it COULD drop 25%. Unlikely, but it could. Just because I did not have everything in the S&P 500 the last five years does not mean I want a big sell off. My below-market returns (because of my wide diversification) are still in my NEED range for future retirement. This was not one of Mr. Clements best moments.
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