All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.
This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.
Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.
Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.
Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.
Expensive Stocks & Higher-Yielding Bonds
An Expensive US Stock Market
Last time I just mentioned that US stocks appear very expensive. This quarter, I show you the evidence. The chart below depicts the proprietary valuation and expected return model I’ve developed for US stocks. It is closely based on an original finding by Nobel Prize–winning economist Robert Shiller.
Let me first explain what you’re looking at. The green line on the chart is taking the very long-term average of corporate earnings, adjusting them for inflation, and using them to try to predict the future 10-year stock market return. Importantly, the model only uses data I’m confident was actually available at any given point in time on the chart.
The black line represents the actual 10-year return US stocks delivered from each given date. That’s why it stops short: We don’t yet know the 10-year forward return for the last 10 years.
You can visually see the model is highly predictive of the 10-year future return for US stocks (the black line closely follows the green line). Statistically, the model accounts for 80% of the variance in long-term stock market returns. That’s about as good as you can get trying to predict anything in finance.
Right now, the model is suggesting the future 10-year return for the US stock market is a measly 3.30%. That’s well below the historical return of 6% plus inflation annually, well below the current yield on 10-year government bonds, and well below the return you can get on cash. Does that mean I’m recommending clients sell all their stocks? No! In fact, I’d totally ignore this ominous model if it weren’t for other negative data from a completely different domain. Only because recession indicators are also flashing red does the overvalued stock market concern me. Price trends also matter. And US stocks continue to hold up. So we are not as conservatively positioned as we could be for these reasons.
But despite all the bullishness in the market, consider these points:
The Asymmetric Opportunity in Bonds
This has been another bad year for bonds, similar to last year. But yields have risen high enough now that the upside to bonds greatly exceeds the downside.
To illustrate this, look at the bond math behind modeling the future 12-month return of different government bonds given different changes in interest rates. While bonds are always negatively impacted by rising interest rates, the upside in a falling-rate environment is multiples what the downside is in a rising-rate environment. And with a recession possibly on the horizon, the latter scenario I think is more likely.
Government bonds yield between 4% and 5%, depending on maturities, exceed current inflation, and are much higher than the 2.47% annualized inflation investors expect over the next 10-years. You can basically lock in a 1% to 2% return over inflation for many years. There are risks to high-yielding cash investments now. If interest rates go down, your savings account will simply yield less. But bonds allow you to lock in long-term yields, potentially earning a capital appreciation kicker if interest rates fall near term. And US Treasuries are guaranteed to pay out at par at maturity and, unlike savings accounts, the interest income along the way is not taxed by the states (of particular interest to my California clients, I’m sure).
Reiterating Hesperian's Investment Views
To sum up:
I'm Available for a Portfolio Discussion
Thank you for reading. If you’d like a more detailed portfolio review, my door is always open. Give me a call or send me an email. Do you have your money working hard for you? If you’re not satisfied, let’s build you the appropriate portfolio. Set up a time to talk.
Until we speak again, enjoy the holidays. And let me know how I can be of further service to you in your financial life.
Eric R. Figueroa, CFP®
eric@hesperianwealth.com
(916) 546-5203
Find a Time to Meet
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.
This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.
Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.
Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.
Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.