Doom is around the corner, at least one forecaster believes so
“There is a correction every seven to eight years, and they tend to be anywhere from 40 to 70 percent,” Stockman said recently on CNBC’s “Futures Now.” “If you have to work for a living, get out of the casino because it’s a dangerous place. *
Pessimism, doom, and gloom are so much easier in attracting headlines. This seems more prevalent as equity markets extend gains. After all, when will the bull market end? Great question is isn’t. This fellow, Stockman, has been wrong before; during the summer again, he predicted a 34% drop in the S&P 500. *
Since we last published the chart below in April of this year conditions suggesting a continued rise in equity prices have improved. To gain clarity in estimating valuations and equity price direction, many years ago we developed our own analysis and method for assessing Equity valuations: The chart below is the result of our proprietary ** guessing apparatus.
Chart: Courtesy of Dominguez & Jones Wealth Management Group, LLC.
So, if the RED line sits under the BLUE line equity are likely to decline according to this method.The opposite is true if the Red line is above the Blue line. How accurate is this method? There are very few things that are absolute; this is not one of them. However, the inflection points, the lines crossing, is indicative of a change in the character of the equity markets, we believe. So what is it telling us?
We believe equity markets are bullish for the foreseeable future. In the short-term, however, we remain cautious, there is less room for valuation errors. Corrections and consolidations are normal and should be expected. What we do not know is how long will consolidations be or how steep the correction will extend. However, we believe deep downdrafts occur during recessions, not bull markets. Expect a pause.
And remember, please, “Forecasts create the mirage that the future is knowable.” – quote, attributed to Peter Bernstein.***
Oh yeah, a point of contention: The reference to the casino really bugs me. Here’s why, one, in a casino the odds are always on the side of the house. In the U.S. equity market (S&P 500) the probability of success, more money than you started with, is 100% if you, the investor stays invested over a 20-year rolling period and a paltry 93% in a 10 year rolling period ****. Stay-in you-win, why? Because, point # two, more than a few million folks get up every morning, wash-up, clean-up, dress-up and spend the better part of their day working on the shareholder’s behalf. That would be you. And, their job is to find a way to deliver value to their customers to generate enough profit that you, the investor, gets paid a dividend. That is not a casino. That is capitalism operating within the context of a free society.
Stand-up, cheer-up and celebrate, you are a shareholder! No pessimists around here….
Our portfolios and strategies reflect overweighted positions in US and International Equities.
Carlos Dominguez, CFP® – Portfolio Manager
*The quote is credited to David Stockman, in an interview on CNBC, Sept. 30th, 2017. According to Wikipedia, “David Alan Stockman is an author, former businessman and U.S. politician who served as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget under President Ronald Reagan.”
**The advisors at The Dominguez and Jones Wealth Management Group. LLC., developed a proprietary analysis and method based on earnings, actual and estimated as well as interest rate levels to ascertain possible inflection points in the US Equity Market.
*** Peter Lewyn Bernstein (January 22, 1919 – June 5, 2009) was an American financial historian, economist and educator whose development and refinement of the efficient-market hypothesis made him one of the country’s best-known authorities in popularizing and presenting investment economics to the general public
****https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer and https://www.crsp.com/files/investments_illustrated/BP_h_2015_crsp_us-en.pdf
Chart Sources: The S&P Indices and S&P Global Co. – Earnings, actual and estimated as well as S&P historical prices. The Federal Reserve Bank of St. Louis for Interest rate data
Sources are being provided for information purposes only. Raymond James is not affiliated with and does not, authorize, or sponsor any of the listed sources. Raymond James is not responsible for the content of any source or the collection or use of information regarding any source’s users and/or members. Past performance may not be indicative of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is considered representative of the U.S. stock Market. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Any opinions are those of Carlos Dominguez and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor recommendation. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.