Global Pandemic recovery proves stubborn. Inflation may be here for a while. Caution continues.
With the nice rally in US stocks, how much has the stock, bond and Real Estate markets already priced in Global Pandemic recovery and a global opening up?
US stocks have traded sideways since May 2021-October 2021. January-April DJI climbed 16%. All the returns were made for the year in those 4 months! Liz Ann Sanders, CIO of Charles Schwab Bloomberg October 17, 2021 explained “Since the May 2021 Market Top, the S&P 500 median stock dropped 18% and the NASDAQ median stock has dropped over 40%.” “This stealth stock market crash is why small investors are very frustrated!’
Currently, the S&P 500 forward Price/Earnings ratio (p/e) is around 21x (WSJ Oct 16,2021), with Trailing p/e 31x. So, looking rather expensive! Yes, US stocks are expected to grow earnings by 33% in the next 12 months. Even if that happens, my opinion is that much of the great news is already priced in. The US Federal Reserve expects 2023 and 2024 to see US growth at 2%-3%. (St. Louis Fed, October 15, 2021) Underweight US stocks.
Emerging Markets, on the other hand, trade at a forward p/e is 4.5x exhibiting extraordinary pessimism. Emerging markets are expected to grow 4%-6% in 2022 and 2023. Over 40% decline in Chinese Tech has rendered Emerging Market stocks a dismal 0% year to date return. This is the largest disparity between US and Emerging Markets that I have seen since the 1990’s! Overweight Emerging Market stock.
Developed world stocks trade at 6.5x forward p/e. Growth sector is expected to be similar to US. This leads us to ask: why pay roughly 3x more for US stocks? Overweight Developed world stocks.
US Aggregate Bond Index is down 1% for the year. International Bonds (BNDX) down 2% for the year. Floating Rate Notes have enjoyed over 5% YTD and Inflation Protected bonds have enjoyed 2.2% YTD. As a result, a broad-based bond portfolio has hung in pretty well with climbing interest rates so far.
US Publicly traded Real Estate Index is up over 20% YTD. My guess is your home is up 20% as well! As inflation fears die down over the next year, it might be tougher to get these returns, however, private REITS may continue to offer high 5% yields.
How about commodities?
Commodity Indexes have continued to soar this year climbing over 50%. If inflation fears recede next year, further capital appreciation might be difficult.
Neutral opinion of commodities.
As the World Reopens over the next year, my opinion is that lower stock valuations overseas may provide a better spot to be than US stocks. There may be one more run higher in stocks as Global Government Spending and Global Central Banks keeping capital plentiful. However, the ‘Fiscal Cliff’ happens when all this winds down next summer. This may prove difficult for markets to digest. Then, we may be back to 2% growth, 2% interest rates and a volatile US stock market into 2023.
Disclosure: The information and opinions presented here are those of Wade McFee and are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions, views and information expressed in this commentary are subject to change without notice based on market conditions and other factors. You should contact your investment representative, attorney, accountant or tax advisor with regard to your individual situation
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*The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
*The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad-based index
*The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.
*A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing properties. REITs generate a steady income stream for investors but offer little in the way of capital appreciation.
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