Equities are expensive. It’s difficult to argue against this. But does this also mean that markets will fall sharply? Assuming that there are plenty of other factors that could drag equity prices lower, the high valuation alone is probably not enough reason for a new market correction. Granted, the price-earnings ratio is high, in some cases even historically high. The Shiller PE, which looks at corporate earnings development over the last ten years, is over 30 in the US, which happens rarely. And the graph shows that Warren Buffett’s favorite valuation indicator – total market capitalization as a percentage of GDP – also indicates historically high equity valuations.   Correction looming? Are the high equity valuations the harbinger of a correction? Given the high degree of … [Read More...]

Regime shift US stocks have outperformed their global and emerging counterparts by a mile in the last ten years. But this hasn’t always been the case. For example, in the decade prior to that, the S&P 500 Index realized a negative return while emerging markets skyrocketed 188%. So what about the ten years to come? Given the lofty valuation of US stocks, the CAPE being above 30, stock markets outside the US may well outperform. That said, the performance gap between US and the rest of the world can partly be explained by the US being home to a number of technology firms that have reshaped many aspects of daily life. This is not something that will shift overnight. Is the manufacturing glass half full or half empty? … [Read More...]

Since the low point for the equity markets during the global financial crisis in 2009, Eurozone equities have lagged their US counterparts by an impressive 300%. Why is this? By the look of things, it’s a combination of different factors. The first – and most important – reason is that US companies have performed much better than their European counterparts when it comes to corporate earnings. The graph below shows that since March 2009, the earnings per share of companies in the S&P 500 have increased 170%, compared with an increase in earnings of precisely 0% for companies in the Eurostoxx 50. Some of this difference can be explained by share buybacks, but for the most part it can simply be put down to profitability. Heavyweights The second reason is … [Read More...]

Here’s this year’s update of the ‘average return doesn’t exist’ blog showing that the average return on equities is mostly a statistic, and is seldomly seen in reality. And last year is another brilliant example of that. The Dow Jones Industrial Average realized a a positive return of more than 22% in 2019, miles away from the average return of 7.4% since 1900. It also underpins that using this long-term average for forecasting annual returns, as many professional forecasters tend to do, will do little good for your ‘guru’ status. Those who dare to put in ‘obviously’ far too bearish or far too bullish forecasts have (much) better odds in getting it right. The graph below shows the calendar year returns on the Dow Jones Industrial … [Read More...]

The chart above, created by JP Morgan, shows the calendar year returns on the S&P 500 Index and the intra-year drops that occurred during those years. This reveals an interesting picture. The average annual return since 1980 is 8.4%, a number which will likely ring a bell for investors familiar with long-term equity returns. But it is perhaps less well-known that the S&P 500 Index also recorded an average intra-year drop of 13.9%. So, on average, investors have had to deal with a significant decline in stock prices in every year. So far this year, including the current drop in equity futures because of US President Trump’s tweets on increasing tariffs on Chinese imports, the maximum intra-year decline is just 2%. The odds… [Read More...]