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The Indicated Could Be Vindicated

February 11, 2019

|Daniel A. White

Too many are calling for incredible market growth when the hard numbers say otherwise.

As humans, we’re prone to hubris, which can make us lose sight of risk. For investors, that means thinking huge returns are the norm and that risk is negligible.

In volatile economic times, that could be a deadly combination.

The truth is, we’re in the slowest post-war economic recovery in history. Growth is lackluster, productivity isn’t improving, and real wages have only recently begun to tick up. Plus, a quarter or more of firms in the Russell 3000 index, which represents nearly the entire U.S. stock market, are losing money.

Yet, the market remains up.

Maybe it’s all the financial engineering…I mean stock buybacks.

Or maybe it’s that individual investors are returning to the party while global fund managers reluctantly resort to buying U.S. equities, which is seldom a good thing. They all think the bull run will go on. Such an optimistic outlook and disregard for risk comes from crazy beliefs.

For instance, they think price-to-earnings ratios (PE ratios) will soar to new heights. They believe the same for growth and profitability, and that every firm will ultimately be a clone of the current favorites – Facebook, Amazon, Apple, Netflix and Google – the so-called FAANG stocks.

Me? I’m skeptical.

The Standard & Poor 500 (S&P 500) returns about 6 percent nominally throughout history. Only 2 percent is growth, the rest is inflation. So, to keep delivering this kind of performance, the S&P 500 would need to hit 9 percent returns for a decade.

Fat chance.

I like to think the glass is half-full. But other technical indicators tell a similarly sour story. So, call me pessimistic, but to believe we’ll continue making history while contradicting the data seems a bit foolish.

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