January 4, 2019
Dear Family, Friends and Clients,
Happy New Year!
There are two major themes in today's stock market letter.
1. Things are NOT as bad as they seem
2. I've been "born again"
#1: Things are NOT as bad as they seem
At the time of this writing, the S&P 500 is trading at 2,516 up 2.82% on the day. The combined estimated earnings looking forward 12 months, of the S&P looking is about $173 per share. If you divide $173 by 2,516 you get 0.06875 or a 6.875% earning yield on the S&P 500. This is still a very attractive earning yield.
If we use the earnings from last year in September 2018, we divide $130 by 2,516 and get a yield of 5.166%. It still beats the 10 Year US treasury rate of 2.657%. *
For those of you who are contrarian investors, not only do we have a behavioral reason to buy at these levels (see the cover image of Bloomberg Business) ; we have a fundamental reason in so far as the earnings of the largest companies in the S&P 500 are still attractive.
Optimism remains the only logical
and rational certainty
I don't think there has ever been a time in the history of our Nation, where there has been so much pessimism as there is today.
Yeah, right.
Forget about WWII, Korean War, Vietnam War, Cuban Missile Crisis, 1970's Inflation, Stagflation, 21% interest rates, threat of global Thermonuclear War, Savings and Loan Bailout, 1987 Stock market crash, 1989 mini crash, Operation Desert Storm, Japanese market bubble, Asian contagion, Russian crisis, Long Term Capital Management, Y2K, 9-11 attack on the World Trade Center, dot.com bubble, Invasion of Iraq, Chinese stock bubble of 2007, The Great Recession of 2009, 2010 Flash Crash, the 2011 downgrading of US debt, 2015-2016 sell off, and the recent 2018 blip of a decline.
Did I leave anything out?
Main stream news media continues its
"sortie of fear" while the market ignores it and keeps chugging away.
#2: I've been "born again"
My prediction for the coming year is the "Return to Normalcy".
- Return to Normalcy as virtually every US and International asset class will be slightly positive. The bull market is going to take a slight breather but is still positive including dividends and buybacks. (More than $7 trillion has been returned to shareholders in the form of buybacks and dividends since the bull market started in March 2009, according to data compiled by S&P Dow Jones Indices)
- Guaranteed lifetime income: For most of my career I've been incredibly suspicious on insurance products as part of a diversified investment portfolio, but recent developments in the bond market have made me a "born again" disciple of carefully selected insurance products providing a guaranteed lifetime income paycheck to those in or near retirement. See the chart of the US Treasury 10 year below.
I have a whole new appreciation for insurance companies as they are the only industry with the legal, regulatory and actuarial solution for people on fixed income in a negative or low interest rate environment.
The highest level in the 10 year Treasury rate was made in 1981 at 15.58%. The low was made
in the fall of 2016 at 1.33%. A decline of 91%. If interest rates stay the same or begin a slow and steady rise over the next 20 years, the only product I can find that can offer a guaranteed monthly income paycheck, with no capital loss, is a Single Premium Immediate Annuity or a Fixed Income Annuity.
There, I said it. Annuity. A bolt of lightning did not strike me dead!
Bond funds
decline in value when interest rates increase.I think we're going to witness a decade where bond fund losses will equal the income, making investors a net loser after inflation on as much as 40% or their portfolio. This doesn't make for elegant retirement.
Annuities provide a near zero loss to the downside; in exchange for limited participation to the upside and a guaranteed income credit . I'll go into more details in the weeks to come, after our Form ADV disclosure brochure has been updated, but I firmly believe these products are the answer to a multi-decade, rising bond market for a
portion of your assets. Anyone in, or approaching retirement needs to have a conversation with us.
Contact us to discuss to determine if these products are appropriate for you. We are working through an independent insurance organization, and will have at our disposal approximately
60 insurance underwriters to choose from.
If you need Long Term Care, Term Life Insurance, or the concept of a guaranteed monthly paycheck sounds interesting let's have a conversation. Call our office at 847-686-4800.
3. Return of the Gold Bug: Like a broken clock that's right twice a day, gold bugs are coming out in force, even though it's probably the most under performing investment since the early 1980's. $1,000 worth of gold purchased in 1987 would be worth about $2,500 today. A $1,000 invested in the S&P is worth more than $9,500, if not closer to $15,000 including dividends, stock splits, etc.
If you're a gold bug, we're considering an arrangement with a gold dealer in 2019, but only if there is enough interest from you, our client, to make it worth your time.
Our outlook for the future is still favorable and believe stocks are an attractive purchase.
Respectfully submitted,
Bill
*https://www.yardeni.com/pub/sp500trailpe.pdf
|
