Escaping A Possible ‘Lost Decade’ For The S&P
Last week, while raising their year-end target for the S&P, BofA suggested US equities might be in for a lost decade.
On the face of it, that sounds ironic -- getting more bullish while projecting negative returns. But recall that the bank's updated S&P forecast was a mark-to-market exercise, and a somewhat begrudging one at that. Savita Subramanian's new target still suggests downside for the US benchmark into year-end.
One of the key points was that, as Subramanian wrote, valuation "
I think our political landscape helps set the stage for a lame duck-like clogged sewer era. Covid, as a barometer, points towards a really screwed up society that has no interest in anything but fighting — that’s not conducive for growth. The concept of a lost decade or quarter century is foreseeable when looking at Japan example — but Japan has been able to manage and manipulate its economic position so as to not be a total disaster. It’s complicated.
I mean it really seems like we’ve been in the clogged sewer for decades now. We’re getting ratcheted into facism and making hardly any progress in the occasions we get anyone left of center or even centrish in control. It’s like we’re just got the right and the far right with a little leftist wallpaper over the right’s offices. However remarkably the far right is not actually interested in pulling off some kind of 4th Reich where we rebuild American productivity and take control of the world but rather just erode every last vestige of public good or public trust into a full blown return to Feudalism. As long as we can make a few thousand ferrari’s, jets and iphones a year the rest can burn apparently. No grand designs just plantation Earth with the population as chattel.
My understanding is that the FTSE Russell does not include companies in the calculation of the PE ratio if the company is losing money. If the negative earning companies were included, the PE ratio may well be many multiples higher. So if one wonders why the R-squared is not higher, consider the data on which it is based. Often enough, a majority of the 2000 companies do not make a profit.
If one thinks equities broadly writ will return 0% for the coming decade, there are some approaches to consider, singly or in combination.
Selection: focus on the subset of equities that you think will have an acceptable return. Could be small-caps, ex-US, dividend, etc.
Allocation: focus on something other than equities. Could be fixed income, real assets, private assets, real-world (Main St) projects, etc.
Timing: returning 0% by flatlining for a decade is not the same as going negative for some years and positive for the rest. We’ve discussed QQQ from 4/2000 to 2015 – zero return for the period, but lots of gains after the brutal wipeout.
Money is there to be made in stock picking. Valuation multiples for some sectors and stocks have been beaten down so much that they are in a bear market. Looking at the top 5 stocks in the S&P 500 and they are trading on a weighted forward earnings multiple of 37. As has been stated before these stocks have become a safe haven for all the liquidity sloshing around.