Economic Review: What’s Next For The Stock Market?

Last week, the US stock market closed at an all-time high.

And I’ve received multiple queries asking if this is a true reflection of the economy and what is the best course of action to take right now.

Has there been a meaningful economic recovery at all?

Every time I turn on the radio or TV I hear polarizing views on this topic. Either the economy just hasn’t recovered and we’re in a stock-market (or real estate) bubble on the verge of collapse, or the economy is chugging along like everything is peaches and cream.

Of course, reality lies somewhere in the middle.

Unlike the typical post-recession recovery, this one features below-average job creation, stagnant wages, weak retail sales, and disappointing GDP growth.  But, these represent the average.

The recovery hasn’t been evenly distributed, with some sectors far outpacing others.

At the lower end, minimum wage jobs are plentiful, but it’s next to impossible to support a family on one.  If you’re a low or medium-skilled worker, plenty of jobs are available, although the wages are flat or even slightly lower than they were in 2007.

At the other end of the spectrum, people with graduate degrees face an unemployment rate of less than 3%. Especially those employed in sectors like technology, science, engineering or math, which pay 50% more than the median US wage.

Or, if you’re working in the booming Shale Oil regions of North Dakota, unemployment is virtually zero. Even Walmart, which is notorious for being a poor paymaster, is willing to start off its employees at $17.20 an hour.

Instead of creating jobs, the Federal Reserve’s quantitative easing and zero interest rate policies may have just helped boost stock prices and real estate values.

But if you don’t own any assets or have access to cheap financing, these policies aren’t really helping you.

Less than 65% of the US population owns real estate.  And only 50% of the people own any stocks.

If anything, it would appear that the Federal Reserve policies seem to be increasing the divide between the bottom half and the top half of society.

Over the long term, this increasing disparity is bad for the economy.  We want a virtuous cycle, where increased wages for everyone leads to higher consumer spending and thus a more robust economy.

And it might be even worse than it appears on the surface.

According to the Pew Research Center, the top 7% of households have gotten 28% richer while the bottom 93% saw their wealth decline 4%.

While there are certain caveats to their methodology (like using income vs. net worth, or mean vs. median numbers, as well as differing sources of data), it’s directionally accurate. The richer someone is, the more likely he is to own stocks and real estate, and it makes sense he or she would benefit disproportionally in the current environment.

But in general, the average person can’t be bothered with their investments.

According to a recent survey of 1,000 US investors by Gallup, 30% thought US stocks were flat, or had declined last year. This is in the face of a record performance in terms of stock market gains. And only 7% of investors were aware of this performance.  This means 93% of investors were unaware of the stock market’s record performance.

If I had to guess, it’s probably the same 93% who’ve seen their wealth decline in the past five years.

Looking back at every 5-year period since 1871, the last 5 year period has been the 4^th best time to be an investor. In fact, over the past decade, the stock market returns have been pretty much in line with the long term average returns we’ve seen over the past several decades.

If you’ve struggled with your investment returns during the past five years, your future performance is unlikely to be any better.

This year the stock market has performed better than most people expected.

Nearly every single asset class is up for the year, including last year’s worst performer – Gold Mining Stocks which are up about 25%, followed by US Real Estate Stocks which are up 21%.

Overall, every single one of our diversified portfolios is up over 6% (individual account performance may differ based on when they were funded), with the exception of our Dividend Stock portfolio which was up over 10%, outpacing the return of the S&P500.

Meanwhile, it seems like there are a lot of “experts” on TV calling for a crash.

Mostly recently, founder of the Prudent Bear Fund (BEARX) – David Tice, called for a 60% crash in stocks.

He’s made similar calls in 2012 and 2010. And he’s been wrong every time. Meanwhile the BEARX fund has had a negative rate of return over every time period – it basically lost money over the past 1 year, 3 years, 5 years, 10 years, and 15 years.

Meanwhile, it charges 1.75% in fees and manages nearly half a billion dollars.

How do you manage so much money, charge such high fees, and yet provide such lousy performance?

By selling fear.

But, the real poster child for fear mongering is John Hussmann.

Author of a weekly newsletter, John Hussman has a PhD in economics and has been bearish on the US economy for the past several years. His fund, the Hussman Strategic Growth Fund (HSGFX), has also managed to provide negative returns over every time period.  Unlike BEARX, however, he even managed to lose money in 2008.

He’s figured out how to lose money in every possible situation. Quite an achievement!

But his fund manages over a billion dollars. With a 1.08% expense ratio, he manages to pull in over $10 million a year for the privilege of losing money.  What a great gig!

While bearish “experts” like Tice and Hussman frequently cite the poor economic recovery as a reason for expecting a major stock market crash, I’d like to point out that there is absolutely no correlation between GDP growth and stock market returns. The economist has an interesting article on this illusion of growth.

As an example, look at Greece – while it’s economy has been shrinking over the past few years, the Greece country fund (GREK) has been a top performer returning 29% and 24% in 2012 and 2013 respectively.

So what do you do?

My advice is to ignore all the news you hear on TV. These “experts” usually have some hidden agenda and have often paid a couple of thousand dollars to be on show.  Additionally their grandiose predictions and passionate sound bites help boosting TV ratings.

You’re better off turning off the financial news and reading some good books instead.

Don’t get me wrong. We will definitely see a decline in the stock market at some point.

In fact, a 20% decline typically occurs once every 4 years, and a 30% decline once a decade. But this is a normal and expected part of the investment process.

So far, our academically-proven process of investing in a diverse portfolio coupled with regular rebalancing has been working extremely well. And we expect this methodology to continue to provide great results into the far future.

So my advice is to continue investing according to your long-term strategy. If the market declines, you’ll be making future purchases at a discount.

And regardless of what happens in the near-term, your long-term performance is determined by your time in the market, and not by timing the market.

It’s the last day of the last weekend of summer.  Spend your time enjoying it and not worrying about the short-term fluctuations in the market.

If you’d like to sit down to discuss your financial situation, or need a second opinion on your portfolio, I’m always happy to do so.

Wish you a happy Labor Day!