5 Things To Ponder: Markets, Valuations & Investing

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

In yesterday's post, I showed several charts that "Market Bulls Should Consider" as the mainstream media, analysts and economists continue to become more ebullient as we enter the new year.  This weekend's "Things To Ponder" follows along with this contrarian thought process particularly as it appears that virtually all "bears" have now been forced into hibernation.

David Rosenberg recently penned a piece for the Financial Post discussing his views on why the market in 2014 still has room to run.  While his arguments of stronger economic growth via increased fixed capital investment (discussed in detail here), a steep yield curve and rising leading economic indicators (LEI) are certainly compelling; it is worth noting that the last two arguments have been directly impacted, to a large degree, by the interventions of the Federal Reserve.  The article is well worth reading as it provides the context behind today's missive.

 

1) The US Is The Most Expensive Developed Market In The World via Zero Hedge

"The chart speaks for itself, but for those greatly rotating their 'cash on the sidelines' into stocks; JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world..."

zero-hedge-011014

 

[Note:  The reference to "cash on the sidelines" is part of Cliff Asness' 10 Pet Peeves which is a must read for any investor.]

For more charts from JP Morgan on market valuation go here.

 

2) The Biggest Redistribution Of Wealth From The Poor To The Rich by Shane Obata-Marusic (@sobata416)

While the current administration has continued to promote the "war on poverty" the reality is that, as stated by Robert Rector, it has been less than successful.

"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."

Shane's most recent study discusses the ongoing impact of the Federal Reserve's "quantitative easing" programs as a wealth transfer mechanism from the poor and middle class to the rich.  The implications of this transfer effect, as shown in the chart below, on an economy that is nearly 70% driven by personal consumption expenditures suggests that the real "wealth effect" of the Fed's interventions has been a negative rather than a positive.

The-Great-Wealth-Transfer

 

3) 5 Questions On The Economy To Be Answered In 2014 via The Wall Street Journal

Economic forecasters are counting on 2014 to be a breakout year. But whether the economy finally moves past its sluggish growth will rest on several forces playing out differently than they have since the recovery began. Some of the key questions that must be answered in the coming year are:

  • Will businesses finally shed their caution?
  • Will Washington's tentative truce continue?
  • Will the Fed's path out of the bond buying get bumpy?
  • Will housing adjust easily to higher interest rates?
  • Will the rest of the world cooperate?

While the WSJ gives their assessment the importance of the questions, and how you personally answer them, are critical as to how you structure your current asset allocation.

 

4) How To Lose Money In A Hurry by Mark Hulbert; WSJ MarketWatch

Mark Hulbert wrote a great piece discussing the most often forgotten phrase by investors; "Past performance is no guarantee of future results."  As he states:

"'This phrase, ubiquitous in the small print of financial products, often falls on deaf ears,' according to Adam Reed, a finance professor at the University of North Carolina at Chapel Hill. 'Investors have a tendency to rush into those funds that are at the top of the previous year's performance rankings,' he says, citing numerous studies.

 

They shouldn't. The evidence is that last year's top performers will lag the market in 2014 — if not lose a lot of money."

This is clearly shown in the following periodic table of returns by Callan.  While it is entirely possible that chasing the stock market in 2014 could yield a positive return, it is also likely that an unloved asset class like "bonds" could just as well rise to the surface.  Just food for thought.

Callan Periodic Table of Investment Returns-2012-notated

 

5) The Death Of Long Term Thinking (1800-2013) an Obituary by Morgan Housel

I have written and articulated many times in the past that the "long term investor" is dead.  In a market driven by artificial interventions, high frequency and program trading and a "casino" mentality by individuals the age old axioms of "buy cheap and sell dear" have all but been forgotten.  This idea was brilliantly opined in this obituary of "Long Term Thinking."

"Long-Term Thinking died on Tuesday. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.

 

Long-Term Thinking lived an illustrious life since the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came Monday, when a trader on CNBC warned that a 10% market pullback -- which has occurred on average every 11 months over the last century -- could be 'devastating' for investors. 'That's it,' Long-Term Thinking whispered from his hospital bed. 'There's no more room for me here.' He died soon after Bloomberg published its daily tally of how much the net worths of the world's billionaires changed in the previous 24 hours."

And on that sad note I leave you to ponder the risk in your portfolio, the potential for 2014 and how the "evolution of cats explains why they are grumpy."