Juggling Dynamite

The chart below shows the factors which have driven price gains in the S&P 500 stock index over the last decade, since 2011.  The breakdown should concern thinking people.

A full 40.4% of price gains (in green) have come from companies buying back their shares (something considered illegal market manipulation up until 1982).  Another 21% (dark blue) has come from buyers paying a higher multiple for the same dollar of earnings.  Just 7.1% (in red) has come from dividend increases and 31.5% (light blue) from a rise in profits.

In other words, in the absence of share repurchases, the S&P would now be closer to 2700 than 4600 and have averaged a total of about 3% annually (before any fees) since the last cycle highs in October 2007–14 years ago.  Lance Roberts offers further context here:

“Before you scoff at a 3% annualized return, such equates to an economy growing at 2% with a 1-2% dividend yield. Moreover, that calculation aligns with historical norms going back to 1900.”

Through this latest epic episode of inflated valuations and capital risk, most individuals and even pensions have fared worse than the headline indices because of real-world factors like price volatility, fear, greed, fees, income and capital withdrawals needed along the way.

And here’s a pro tip:  like individuals, corporations that indiscriminately funnel their cash into corporate securities during bull markets are typically left weaker in the long run because they do so at the expense of productive and lasting investment in their operations and financial stability.  They buy most near cycle tops and least near cycle bottoms when investment opportunities are most valuable because they come into bear markets and recessions short on cash and long on risk.

The other major issue is that valuations are now in the 100th percentile of historical occurrences–a zone that has always ended in multi-quarter loss cycles of 50%+, that wiped out many completely and took years for even the survivors to recover.

This chart shows the S&P 5oo price (in black) since 1870, its long-term trend (red line), as well as the historically informative Crestmont monthly price to earnings ratio (in blue)–today at 43.9, 198% above its long-term mean. Above every other secular peak from which deep, protracted bear markets followed.

Those who lack the ability or willingness to lose capital and wait years hoping to recover have no business owning stocks and corporate debt (including funds and ETFs of them) today; and yet, individuals, asset managers and speculators have never been more fully allocated.  This is a recipe for years of financial regret.

Fossil fuels are inextricably linked to our everyday lives and it’ll be impossible to phase them out in the next three decades. At least that’s what the fossil fuel industry would have you believe. But new studies have looked at precisely what we DO need to do to rapidly rid ourselves of the largest historical, and current, cause of the global climate emergency.

Here is a direct video link.

After broad selling last week, the risk trade is bouncing.  Most stocks are now trading below recent highs and not just the most sketchy ‘meme’ names.  As shown below, courtesy of Mac10, beneath the hood, just 43% of even the widely considered ‘conservative’ Dow 30 components (red line) are above their 200-day moving averages. In comparison, the Dow index (in black) remains less than 2% beneath its November high.

At the same time, S&P futures net speculative long positions (lower panel) are back at highs not seen since December 2018 before the Fed announced its fourth rate hike of that year to 2.50%–and the last hike since.  As stocks dumped and the economy slowed into 2019, the Fed was back to cutting rates by August that year.

The five most expensive FAANG stocks continue to levitate the NASDAQ to concentration risk levels beyond the Dow (which only has Apple).  As shown below from my partner Cory Venable, the market capitalization (price x shares) of the NASDAQ 100 remains near a record ratio of the Dow Jones Index–a distortion only seen once before at the fleeting tech top March 2000.

The euphoria of this cycle is much broader and more extreme than the 2000 dot.com-led bubble–by far.  As shown below, courtesy of Real Investment Advice and ISABELNET.com, the S&P 500 Index price is an ominous 61% above its exponential growth trend since 1900, a line under which stock prices have dipped below and laboured for years after previous (and lesser) bubble’s burst.   This time won’t be different.

All’s well that ends well–and for the masses who have bought in, this cycle won’t end well.  As Jeremy Grantham has wisely observed from his decades of building billions:  “sooner or later, you will have made money to have sidestepped the bubble phase.” Believe it or not.