The following slides represent some of the best illustrations that I know of for explaining trends going on right now, particularly in finance.
Below, you can see how the US large company index performed over the past 20 years.
From 1997 to the year 2000 or so the 106% run-up for the dot.com era and the subsequent 49% crash.
Followed by the 101% increase from the financial shenanigans and housing crisis era, and its 57% drop in 2008 and 2009, which was the second worst crash in history behind only the great depression.
Since 2009, it took about five years to get back to even from that original period. We are up a full 331%, which is a bit scary if you look at simply in this context.
However, unlike a ball
In keeping with that price to earnings discussion from the previous slide, you see below the 25-year average price to earnings ratio while it varies quite a bit is 16.1.
We're currently at 16.8, ever so slightly elevated. Even the scary and famous cyclically adjusted price to earnings ratio, also known as Shiller's PE or the CAPE ratio is at 33 versus 27, so just ever so slightly high. The dividend yield is right on par with averages. Price-to-book is a little high but very close. Price-to-cash flow is a little high, so the valuations are not extreme, and that's one of the things that people don't realize.
We had a massive tax cut recently and also companies not only in the US but across the world are benefiting from
The next slide, slide 14, is a little bit difficult to read, but once you understand what the red numbers mean, it's fairly simple.
The red numbers mean what the worst drawdown from top to bottom was in the year and for 2018, you can see we've had a 10% drawdown that was back in February when we had that scary pullback, and you see the year before we were only down 3%.
The average intra-year drop over the last 25 years or so is about 14%, so this is helpful when we're dealing with daily volatility and the news of the day. It's a chore to try to flush out whether the financial media is just trying to scare us into making sure we watch the evening news, or if there's actually something of substance going on. More often than not, there is not anything of substance going on when it comes to your retirement assets.
We don't need to make adjustments depending on what's going on Twitter or CNN.
We want to stay the course, and you can see that on the average stock market tends to perform to 8% to 10% per year and of the last 25 years or so, we've only had about seven down periods.
You'll see in the next slide, 17, again with the what goes up must come down comment and this goes all the way back to the year 1900. You can see the great roaring 20s and the great depression and how that recovered over time and you can tend to see a pattern here, it doesn't mean it's going to repeat of course. We are incidentally in the longest bull market in history now.
The stock market took a little bit longer, about five years over that last period, but these recessions do happen and are a natural part of the economy.
For another perspective, on the left-hand
There's a lot out there in the news on the job market, and unfortunately, technology has made a negative impact
Furthermore, if you have a college degree and live in Minnesota, your unemployment rate is less than 2%, which is an amazing job market right now.
In the upper right-hand corner, it's kind of interesting how you can see where the labor force participation rate dropping, a lot of aging out and there have been rumors that opioid addiction crisis across the country is also one of the factors involved here. You can see on the bottom right all the info finance and business jobs, manufacturing jobs that have been created. There are leisure and hospitality as well along with education, mining and government are minimal.
Here is slide 26 to show anybody that is struggling with higher education thoughts in your household or perhaps grandchildren. You see that college or greater unemployment rate at 2.1% and that's actually lower in the great state of Minnesota.
Then you have your average annual earnings by highest degree earned closing in on $100,000 for those with an advanced degree. There is a lot of debate around college and then particularly around whether certain professions are worth the education costs and time required. It's certainly something that concerns me with our four children, but if you do pick a career path that is viable, it still can make sense. Hopefully, in the future, we will have lower cost e-learning opportunities that will slow if not reverse the rate of education inflation that we are seeing.
Slide 27 is an interesting reminder of inflation. We're looking at somewhere between 1% and 3% inflation right now. This is a big target for the fed and they're keeping
The Fed has said they want inflation somewhere around 2% give or take and we are there.
Few are talking about it these days, but it's interesting you can see the price of energy has gone up 10.3% recently, oil has continued to be very volatile.
You can see the fed funds and interest rate chart on slide 31 where depending on who you believe (market or the Fed) we are looking like we're maybe three-quarters of a point out from where the Fed wants to be long-term, which is great.
The thought is too that everybody pretty much knows these interest rates are coming, the fed has been very clear in communicating this line of reasoning, and the markets should not be thrown off by more rate increases.
We are, however, seeing some slowdown in the real estate markets as mortgages are becoming dramatically more expensive. Interest rates are still at historical lows and for
Slide 42 is a fun illustration on how quickly we forget. We had an investment committee meeting recently where we were talking about emerging markets returns, and if you see at the bottom right you see "EM" which signifies emerging markets like Brazil, Russia, India, China, et cetera down 7.4% this year for a variety of reasons.
But last year they were up almost 38%!
So it's what have done for me lately in everything, but with investing, you have to have some long-term awareness. Otherwise, you will jump from lane to another and make things worse.
You see ex-US (international stocks) down 1.6% and 2.7%. Japan is up just a little bit, and again last year, these positions were up 24% to 28%.
The US last year was up 21.8%, this year is up 10.6%. It's been phenomenal; I'll take it.
Earnings per share growth
Below you see the US dollar, which has recently appreciated 36% in the last five years or so. This is one of the reasons international has had some problems. We don't know what the currency is going to do, but we do occasionally get slight up or slight down results based on exchange rates. We look at currency hedging occasionally, but for the most part, we don't.
Slide 44 shows the first graph that I started with that shows that we're up 331% from the low in 2009.
It shows the non-US stocks that are up 115% since then, and this is not to say that non-US stock should also be up 300%, but it's interesting when you look at the chart on the upper left you see the price to earnings ratio on the S&P of 16.8.
In this case, they've got the 20-year average at 15.9, and then you see the non-US stocks 12.9
So US stocks are more expensive on average and non-US stocks are quite a bit less expensive on average.
The dividend yield is 2% on US stocks, 3.4% on non-US, so 173% more yield.
As you've heard us say before, we don't know what the stock market is going to do or what particular region is going to do better, but from a valuation perspective, non-US stocks do seem to be more attractively priced at this point.
This is shown a different way on the right-hand chart. You can see the current price to earnings ratio on the US versus the average, you see the blue diamond versus the purple bar, you see it's quite a bit higher than the average, although there is a wide band there and then you see developed markets, abbreviated DM, at 15.5, Europe at 13.5 and emerging markets lower as well.
For those interested in commodities or metals, oil, et cetera, it's interesting to see the current level of prices versus where the averages are.
Everything commodity wise is quite a bit lower than average, not to say that we need to do anything here, but interesting to see.
Every week someone seems to say "this is an all-time high, the market has to crash, should we sell?"
Slide 65 is interesting in that regard. When you see an equity market peak, if you were to invest two years or 24 months for an average market peak, you'd have a 41% return or said another way if you get out too early you would miss out on a 41% return.
Twelve months prior is 23% and so on, and you see two years after a market peak the average return is a -1%.
So if you have again five to twenty years worth of "safe money", you can ride out the market peaks and valleys and hopefully do much better over time.
Please let me know if you have any questions and thanks for taking a look!
Source JPM Guide to the Markets
These articles represent opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.