23 Feb The Next Decade
Wow! What an amazing decade it has been for stocks and bonds. We have recovered from the depths of the financial crisis and consumer confidence to all -time highs and near record market valuations. A lot of money has been made thanks to the Federal Reserve’s easy money policy and the lowering of corporate tax rates. The question now is – what might the next 10 years look like? I think it would be fair to say, probably not as profitable as the past 10 years. The reason being it is much more difficult to outperform when starting from a high valuation rather than a low one. The chart below illustrates that when beginning a new decade from the #1 decile in valuation (today) the average return for that decade has been around 1.3% a year – ick!
A second chart below shows that investors are now paying the highest price for each $dollar of sales generated by the S&P 500 since at least the last 30 years. The reason this chart is important is that sales cannot be manipulated nearly as easily as earnings. With technology, commodity prices, wages and taxes all benefiting profitability, it makes sense for the price to be higher than average, but there doesn’t seem to be much room for change.
It seems pretty obvious from the above charts that the higher the starting valuation, the lower the likely market return.
You may also find it interesting that it is highly unusual for any one of the ten most valuable companies from one decade to be amongst the most valuable ten companies going into the next decade. Below you will see the current list and understand my concern when you realize I own six of the top ten stocks in most of your accounts! Such fact is far from reassuring.
In summary, the next decade is likely to be quite different from the last. We are starting near record lows in interest rates and record highs in corporate debt and stock indexes – that combination is likely to make for some very volatile times. I hope to keep your accounts in a position to take advantage of such situations rather than retreat from them. If I can own a portfolio of growing industry leaders at a fair price with terrific managers, you should do just fine. Some reasonable dividends and a little more interest on cash reserves would also be helpful.
I want to thank you again for the opportunity and trust you have placed in me and please call with any questions, concerns or life changes that I need to be aware of.