So where’s the stock market heading?
It’s a question that Barron’s writers and Wall Street professionals alike are used to hearing from readers and investors.
When I get this question from friends and family members, I usually respond that the very question represents a misguided way of looking at the investment world. I mumble that no mortals, even ones equipped with CFA certifications and advanced degrees from Wharton and Harvard, can predict what the major indexes will do tomorrow, let alone a month or a year from now. So it’s simply best for investors, rather than betting on a bull or bear scenario, to come up with an asset allocation plan that is consistently with one’s investment time horizon and tolerance for risk and then rebalance every quarter or two.
That answer, the financial-advice equivalent of “eat your organic broccoli, not your testosterone supplements,” never seems to silence the question: So where’s the stock market heading?
Not surprisingly, smart people disagree daily on this question. And both often cite solid statistics to back up their radically different points of view.
One popular article on Barron’s right now is an interview with Jeffrey Saut, the respected chief investment strategist with Raymond James.
Saut, who made an accurate call of the recent bottom on oil prices, tells Barron’s Senior Editor Lawrence Strauss that “we are in a secular bull market—secular meaning multiyear, if not multidecade.”
He reminds investors who think that the six-year-old bull market may be long in the tooth that the overall 1982-to-2000 secular bull market lasted for almost two decades. “So I have seen this play before, and secular bull markets tend to last somewhere around 14 or 15 years,” he tells Strauss.
“And they tend to compound at a double-digit rate. So, if we are six years into this bull market, it figures there is probably another eight or nine years left. If you compound forward at double digits, you come up with 4300 for a price objective on the S&P 500 some time in 2023 or 2024.”
Over the weekend, as readers were digesting Saut’s comments, a piece appeared on Business Insider by the site’s president and top editor Henry Blodget calling for stocks to drop rather radically.
“As regular readers know, for the past ~20 months I have been worrying out loud about US stock prices,” writes Blodget. “Specifically, I have suggested that a decline of 30% to 50% would not be a surprise.
He adds, “I haven’t predicted a crash. But I have said clearly that I think stocks will deliver returns that are way below average for the next seven to 10 years. And I certainly won’t be surprised to see stocks crash.”
So has this market bear been selling off his stocks? After all, that would be placing his money where his writing is.
Well not quite. He writes that he still is long stocks but states that earlier this year “I changed the dividend reinvestment policy on my S&P 500 fund. (I’m an indexer — I think stock-picking is generally a lousy strategy for individuals.) Specifically, I stopped reinvesting dividends.”
As he puts it, “this dividend change was a bet that, at some point in the future, I will be able to reinvest the cash from these dividends in stocks at lower prices than today.”
Now I know that there will be many readers who will criticize me for quoting the opinions of Blodget, a former star Merrill Lynch analyst who a decade ago agreed to a lifetime ban from the securities industry after regulators discovered that he wrote private emails disparaging stocks that he was bullish about in public.
And one has to think a bit less of Blodget’s convictions on this bearish call since he isn’t selling off any of his holdings. Merely stopping a dividend reinvestment plan is hardly the behavior of a courageous bear.
Still, Blodget is right to be concerned about stretched valuations. And while you may question his ethical mindset, it’s hard to impeach the thinking of some of the financial minds he cites to back up his concerns, including Yale economics professor and Nobel Prize winner Robert Shiller and Warren Buffett. (Buffett also thinks stocks are overvalued based on the relationship of the stock market’s overall value to the size of the economy.)
Referring to Shiller’s famous cyclically-adjusted price to earnings ratio, Blodget writes that “today’s PE ratio of at least 26 is miles above the long-term average of 15. In fact, it is higher than at any point in the 20th century with the exception of the months that preceded the two biggest stock-market crashes in history.”
Of course, I would be more nervous about stocks if Blodget were actually selling off his index fund or perhaps even shorting it to profit when his scenario comes to pass.
It looks like even Henry isn’t entirely convinced that the good times will end son.