Mike Lipper’s Monday Morning Musings
There Is an Incredible Shortage…
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
“There is an incredible shortage” How often do we read such headlines? Is it true or just a clever ploy of some marketer trying to move extra inventory? Historically, one of the better clues to the existence of rising prices is the number of global locations in which they rise. Nevertheless, in an electronically connected world one needs to be on guard against manipulation, or the new term spoofing, which is an effort to represent a larger supply or demand than actually exists. The very fact that prices are moving suggests, at least temporary, that there is an imbalance between supply and demand.
I submit that there is an unusual shortage of good stocks to buy. The shortage is global and cuts through different market capitalization sizes and is possibly ending. FactSet identified a group of companies that have both price/earnings ratios over 20x and returns on equity of 20% or higher. They then compared their performance for the latest three months and one-year, as shown below:
Name Number 3-Month 1-Year
S&P 500 +19.87% +6.91%
S&P 500 20/20 107 +20.16 +7.32
S&P 500 Ex 20/20 395 +17.56 -10.43
Russell 2000 +22.92 -8.48
Russell 2000 20/20 73 +30.08 +16.42
Russell 2000 Ex 20/20 1889 +25.53 -14.19
MSCI EAFE -5.18 +2.40
MSCI EAFE 20/20 97 +21.50 +12.47
MSCI EAFE Ex 20/20 819 -6.75 +5.15
Clearly, high P/E and ROE stocks performed much better for the 1-Year period and a little bit better for the 3-Month period. Better individual stock performance carried performance for a number of mutual funds. Year-to-date through Thursday, of the 104 equity-oriented mutual fund investment objective averages I examine each week, only 26 gained more than the average S&P 500 Index fund’s return of +1.63%. And just 12 groups had double digit gains. The lack of many winners is one reason 17 IPOs could be sold this week, a number of which are not profitable and were never profitable.
Not Everyone Believes
Rising stock markets thrive on the conversion of cash and other securities into equities. This process is well known as the market climbing a wall of worries. For many would be stock investors, we have a surplus of worries. There is at least $5 Trillion of cash in investors’ brokerage accounts that could come in. Also, I believe it is only a matter of time before bond and bond fund holdings are converted into stocks, hoping to repair the damage done by future rising rates of inflation and interest rates.
There are no perfect forecasting indicators for determining the direction of the stock market, although one of the best for determining the future direction of the stock market incorrectly has been a sample survey of the membership of the American Association of Individual Investors (AAII). Each week they ask a sample of their large membership where the stock market will be in six months. The replies are divided into bullish, bearish, and neutral decisions. Many market analysts count on these judgements being wrong.
Surprise!! we “smart guys” have been wrong. For most of the summer over 40% of the predictions have been bearish, as is the current reading. In addition, bullish predictions are currently the smallest of the three choices. Perhaps the redeeming/selling holders of mutual funds and ETFs have been following the AAII predictions, as they were net redeemers for the last seven weeks. The more active ETF holders, which are often traders, have primarily been selling index funds rather than actively managed vehicles.
There Are Some Long-Term Bulls
A very large brokerage firm with many brokers acting as investment advisors believes that we are in the early stages of a long bull market, which began with the pandemic. Additionally, a large bank complex sees no signs of a late stage bull market and sees the market expanding for at least the next three to four years.
My Advice
Investing is an individual art form. The correct long-term strategy consists primarily of setting your own long-term goals and finding different ways to accomplish them. The multiplicity of the roads you travel to meet your goals must hedge the almost guaranteed probability of being wrong or uncomfortable from time to time. For most of the rest of the current year, unless the market gives us a rare opportunity to buy some real bargains or prune existing holdings, is to relax and do nothing. Those who have true long-term investment objectives beyond the next bear market can dollar-cost average into sound businesses, allowing you to relax at night.
Question:
Are you helping your children and grandchildren understand what you are thinking during these unsettled times? It doesn’t matter if you are right or not. What is important is opening up communication about how you think and how you transition when wrong, as we all will be from time to time.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/09/headlines-excite-dictate-or-respond-not.html
https://mikelipper.blogspot.com/2020/09/mike-lippers-monday-morning-musings-who.html
https://mikelipper.blogspot.com/2020/09/turning-point-or-bump-weekly-blog-645.html
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A. Michael Lipper, CFA
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