Financial Advisor Houston
We are an investment management and Financial advisor Houston Texas. Welcome to our November 26 YouTube, stock talk “keeping you connected to your money”.
For the better part of 18 months, a number of equity strategists and bearish tilting financial commentators on TV and in newsletters have parroted the same mantra. The stock market is “expensive”, overpriced and approaching a top. I heard that into the summer of 2020 as we began to recover from the initial wave of Covid. The S&P500 was around 3400 back then. I hear the exact same thing again into and out of the Presidential election in November of 2020. The S&P 500 was about 3500 into the election and closed the year around 3750.
The same group of commentators were parroting how the Delta covid virus wave 2 would stop consumer spending in the USA and the stock market would drop 10–20% because of it, just this past July 4th. That was with the S&P 500 up to 4350, which at the time was a bit over 15.5% year to date.
The last 3 or 4 months the same group of individuals have been on TV stating that even though they have been wrong for 12–15 months and missed the last 30–40% up moves, that they are totally confident that stocks are even more overvalued, and we are surely due for a -10% or more correction. They never once say those words that I long to hear as an investor or viewer. I have been wrong. No, they are always “just early” even if by a decade or more.
As in the case of the forecast by “legendary” investor Jeremy Grantham of GMO, who first predicted in mid-2010 and every year since, that we were and are in a bubble, overvalued by every metric he uses and the markets would drop 30% plus. So far Mr. Grantham has yet to be wrong, he is just 11 years and 315% too early if you spin it that way.
Viewers, valuation is one of the worst timing indicators for judging markets. Why? There are numerous reasons. From the lack of predictability of earnings, to what the correct interest rate discount rate should be, to my favorite esoteric argument, what is the appropriate equity risk premium to reward a shareholder for owning equities over risk free government bonds.
Case in point, for all those strategists who stated the markets were overvalued at the beginning of the year and were overly cautious? Well, they were kind of correct in one aspect of their argument but totally wrong in their conclusion on others.
For all the talk of bubbles, and manias, and greed (which there definitely are in corners of the markets) the overall valuation of the S&P500, or its Price earnings ratio stands about 21.6 times earnings. And that is roughly the exact same level it stood at the beginning of 2021 when the S&P500 started the year at 3756. Yes, viewers the entire gain in the S&P500 year to date has been driven by sales growth, margin expansion, and finally earnings growth. From a closing value of about $142 a share in S&P500 earnings for 2020, to a soon to be realized number of close to $210 per share in 2021. That is a rise of roughly 48% in the market’s combined earnings in 2021. A 48% rise in the S&P500 for 2021 would equate too roughly? 4840 I would invite viewers to take a look at our forecast for the S&P’s level at the end of 2021 that we laid out 6 months ago.
But viewers, less you think you “missed it” by not being a fully invested bull in 2021, do not fret. While yes, investors not fully invested in 2021 did miss out on a rare year in the markets. But no, it does not mean that 2022 will be a bad or very bad year. While we do believe that there will be a material uptick in realized volatility in the overall market in 2022, particularly in the 1st quarter, we do not believe that it will be a down year.
Nothing in the historic data or the economy should lead one to expect anything but an average year next year in the overall markets. By average? We mean a gain of 8–10% but in a very volatile manner. I can make a good case for our first real correction of 10–12% down in the first half of 2022 should the market experience what we have forecasted and expected to be an exponential move up over the next 2 months. To put that in perspective, the biggest drop we had this year was barely 5%, and it was under 4% on a week to week basis. And we really have not had a correction of over 10% for the last 18 months.
As far as we’re concerned, the overall stock market is still NOT overpriced or priced for perfection. However, that does not mean that there won't be higher volatility in the future than we experienced in 2021.
We will be covering our first half 2022 outlook in an upcoming video, so we look forward to you tuning in. For now, just as we have stated, and tried, time and time again by way of sharing with our listeners and viewers the data for almost 18 months now. It’s a bull market. And that should not be changing over the next year, regardless of what we see as an uptick in volatility in 2022.
Viewers, give us a call here at Oak Harvest and ask to speak to one of our advisors. Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896–0040; we are here to help you on your financial journey into and throughout your retirement years.
Many blessings, stay safe, and have a great weekend.