Weekly Notes With Tiho — Issue 2Happy anniversary.Last month the bull market turned eight.Thats older than someone’s child.Thats older than someones career on the desk of a Wall Street bank.That’s probably too long of a time to spend on the desk of a Wall Street bank, but I better leave that topic for another day.United States stocks have had a impressive run over the last eight years.During the depths of the panic, when that devilish bottom of 666 was printed in March 2009, I hardly doubt many of us — if any — foresaw US equities to be trading above 2,400 points some eight years later.And that doesn’t even include dividends.But this chart does.Have you had the nerves of steel to buy on 06th of March 2009, and more importantly, hold until today — you would be looking at a very handsome profit.US Stocks Are OverpricedThat being said, US has become overpriced.You probably disagree with me, because the media is hooraying every time a new record high is reached.Using any classic valuation method, US stocks are expensive. I’ve recently looked at:Thanks to dshort.com for the links and wonderful charts. The guys also average several of these valuation measures into a composite and than look at the current reading relative to its historical mean.As us Aussies would say, US stocks are bloody expensive.The truth is, market was expensive in early parts of 2015 as well.
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Weekly Notes With Tiho — Issue 2
Last month the bull market turned eight.
Thats older than someone’s child.
Thats older than someones career on the desk of a Wall Street bank.
That’s probably too long of a time to spend on the desk of a Wall Street bank, but I better leave that topic for another day.
United States stocks have had a impressive run over the last eight years.
During the depths of the panic, when that devilish bottom of 666 was printed in March 2009, I hardly doubt many of us — if any — foresaw US equities to be trading above 2,400 points some eight years later.
And that doesn’t even include dividends.
But this chart does.
Have you had the nerves of steel to buy on 06th of March 2009, and more importantly, hold until today — you would be looking at a very handsome profit.
US Stocks Are Overpriced
That being said, US has become overpriced.
You probably disagree with me, because the media is hooraying every time a new record high is reached.
Using any classic valuation method, US stocks are expensive. I’ve recently looked at:
Thanks to dshort.com for the links and wonderful charts. The guys also average several of these valuation measures into a composite and than look at the current reading relative to its historical mean.
As us Aussies would say, US stocks are bloody expensive.
The truth is, market was expensive in early parts of 2015 as well.
And yet it didn’t crash.
Aiding the bears at the time was an economic slowdown. Industrial production and manufacturing started to disappoint, earnings growth turned negative and global trade volumes were contracting.
And yet the US stocks only corrected by about 15% (give or take) and now trade at even higher prices and higher valuations.
So just because stocks are expensive, doesn’t mean they have to crash straight away. As matter of fact, despite the risks I’m discussing, they can still keep moving higher.
Aiding the bulls today is economic moment. We have a synchronized global recovery and there aren’t that many indicators signaling high probability of a recession.
Future Returns Will Disappoint You
Having said that, March 2009 and March 2017 are worlds apart.
Take a moment to observe the chart below, from the lovely people over at Hussman Fund. In March 2009, stocks were priced for a 12% return over the coming 12 year period.
Today, future expected returns for the next decade are not favorable. US equities will eventually disappoint you.
According to John Hussman, stocks are priced for a flat nominal return over the next 12 years. And yes, that also includes dividends.
For the numbers people out there, by flat I mean zero.
As in… zilch.
So the question is not if, just when.
Rest Of The World Has Underperformed
That being said, other regions of the world offer much lower valuations, primarily due to their prolonged period of underperformance.
During the current investment cycle, Emerging Market stocks were the first to peak out in early May of 2011.
They haven’t recovered the drawdown since.
European stocks, on the other hand, managed to push into new multi-year highs on the back of ECB’s monetary stimulus.
However, this region of the world peaked out in June 2014.
It also remains in a drawdown.
If you were to zoom the charts out, both of these regions actually printed record highs back in 2007 and have been trading sideways for a decade.
US stocks are bloody expensive.
Tiho Brkan, April 2017
Moreover, some countries within these regions are even more depressed. They are trading some 50 to 60 percent below their all time highs.
Therefore, one could make an argument of more attractive valuations in these regions.
You see, the media gives Emerging Markets a great spin when their economies are booming and their stock markets have already achieved superb performance.
But this is not a great time to buy.
You got to get in when its cheap, when its depressed, when its been underperforming… underperforming for a long time and therefore its very much disliked.
Foreign stock markets have underperformed the US since 2008.
And as my chart shows, its been a straight line down.
There is a potential for earnings to recover and play catch up towards the United States. KKR Macro Research, with their lovely chart above, makes a case that the gap between Eurozone and US earnings is one of the largest in decades.
While some are celebrating the eighth year of the bull market in US stocks, I’ve been slowly tiling away and turning underweight.
It’s Time To Tilt Your Equity Allocation
For example, in middle of January 2017, I purchased Mexican and Turkish equities just as everyone was dumping them.
They’re both outperforming US equities in 2017.
Turkey is up an impressive 10.6%, while Mexico is on a tear with a 16.4% return.
Twitter followers witnessed these call in real time, especially as the currencies of these countries were crashing.
In recent weeks, I’ve also exposed my clients towards three new investments.
Two Frontier Market economies and one European economy — all of which are extremely depressed.
Unlike the US, these countries offer some long term value and that usually means better CAGR (compound annual growth rate) going forward.
How much of a return could one expect?
It’s hard to say without a crystal ball.
However, I think there is an above average probability it will be better than what US equities are priced to return.
In other words, you’ll make more than zilch.
You need someone with many years of experience to make the right portfolio tilts and to tactically overweight / underweight asset classes for the coming 6 to 12 months.
If you would like to know how I am tilting clients portfolios, which countries I am buying and where I see valuation opportunities — let us make arrangements for an hourly investment consultation.
Get in contact by clicking below, fill out the brief survey and I’ll get back to you within 24 hours.