Since the stock market “bottom” of March 2009, the S&P 500 has climbed 169%, which translates to over 21% per year. Conventional wisdom would tell you that the stock market is overvalued and is due for a correction. But then conventional wisdom probably told you the same thing a year ago when the S&P 500 had climbed 123% in a little over four years. Or possibly even two years ago when the S&P 500 had risen 75% in just over three years.
Not a day goes by that we don’t get reminded of how dangerous the investment environment is. That’s pretty much been the case for the past five years. And the reminders we receive (emails, blogs, etc.) all have pretty similar themes that are repeated over and over, such as:
- The government has printed too much money.
- The dollar is going to become worthless.
- Our country has too much debt.
- Real unemployment is much higher than they say it is.
- Too many people are living off the government.
- Higher taxes are going to kill the economy.
- Social Security is going to bankrupt the United States.
- Obamacare is going to bankrupt the United States.
- Medicare is going to bankrupt the United States.
- You need to have all of your money in gold (or land).
And probably a few more I can’t recall.
Maybe they are correct. Maybe the entire financial system will come crashing down. However, if you have been drinking this kool-aid for the past five years, you have missed out on a 169% move in the U.S. stock market. Admittedly, our business is one where you can be correct and appear incorrect for a long time. But sometimes you can look incorrect for a long time because you are simply incorrect. And if you are incorrect for too long, you just begin to look stupid.
Without defending Administrative actions or Federal Reserve policies, I think it is worthwhile to point out the following:
Maybe the government has printed too much money. However, most of it is sitting in banks and is not in general circulation. For that reason (and others) we are not experiencing the hyperinflation predicted by the doomsdayers. Yet.
When we hear that the dollar is going to become worthless, we ask, “Compared to what?” The dollar’s value is a relative issue. Its value is relative to the yen, the euro, the renminbi, the peso, etc. We’re talking about a collection of currencies around the world whose host countries ALSO have their share of economic problems. We don’t see the dollar becoming worthless any time soon.
Yes, our country probably has too much debt. But maybe…just maybe…we are better able to handle it with our larger economy today. I know that I am better able to handle a larger amount of debt than I could thirty years ago because I make more money than I did thirty years ago.
Unemployment is almost certainly higher than they say it is but, higher or not, it has been decreasing, albeit very slowly, for the past five years. This has been the slowest post-recession job growth ever…but there is growth. And this week it was announced that the 8.7 million jobs lost in the 2008-2009 recession have been regained. In no recession has it ever taken five years to regain jobs that were lost. But the fact that employment is headed the right direction leads me to believe that financial disaster is not impending.
It is common thought that Social Security, Medicare and Obamacare are going to bankrupt the United States. Possibly so, but not any time soon. And before they bankrupt the economy, perhaps our “leaders” will figure out a way to avoid that catastrophe. Our country has a bad habit of not dealing with problems like this until absolutely necessary, but it has a good habit of finally dealing with them when it has no choice. Politics always cloud the solutions.
And then our favorite doomsday advice: put all of your money into gold. Then do what with it? Wait for financial Armageddon? After the financial system has collapsed, modern society as we know it has disappeared and we have reverted to the barter system, you can go to the General Store and buy vittles and supplies with your nuggets of gold. If all of that occurs, I think you will be facing much larger problems than what you should be using as a form of currency. Meanwhile, if you are wrong, you are missing great investment returns and are receiving NO cash flow from your investment. Gold does not pay dividends or interest.
At Boyer & Corporon Wealth Management (BCWM), we remain vigilant looking for signs of impending economic disaster. Meanwhile, keep sending us those emails and articles. Particularly those that pinpoint a specific day that a disastrous economic event will occur. Those are always fun to read.
You need to remember that, just like a broken clock that is correct twice a day, people who persistently make predictions may eventually accidently get one right (see R.I.P. Joe Granville). That doesn’t make them smart. It just makes them persistent. But investors frequently make the mistake of hanging on the advice of an “expert” who allegedly predicted some previous economic calamity. We advise you to resist that urge.
Meanwhile, although the stock market seems to be telling us that the economy is doing well, the bond market might be indicating otherwise. Robust economic activity (or even the anticipation of it) is typically accompanied by rising interest rates. But the 10-year Treasury bond remains stubbornly between 2.5% and 2.7% after trading as high as 3% five months ago. Either the bond market is correct and the economy is NOT that hot or we are going to see higher interest rates in the near future. At BCWM, we lean toward the latter and will not be surprised to see 3% again this year. Keep your eye on the 10-year Treasury bond interest rate.
Barring some geo-political catastrophe, we think the stock market could continue to tick higher. Headline risk continues to be noticeably absent. For the past two years, there have been virtually no geo-political events that have moved the needle. Remember a couple of years ago when Greek bonds were trading at a yield of 29%? The whole world was convinced Greece was on the verge of imminent default. Those bonds are now trading at 5.5%. Yawn!
In May, the stock market (S&P 500) increased a steady 2.34%. Foreign stocks also increased, but slightly less. The past twelve months saw the U.S. stock market up over 20%.
But remember, 2001 and 2008 were so bad that the average annual return on the U.S. stock market since December 31, 1999 is 3.84%, which is a far cry from its historical annual average of close to 10%.
At BCWM, we are not changing our current allocation to equity. However, in light of our view that interest rates will eventually trend upward, we are slowly looking to shorten the duration of our fixed income securities.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.