What caught my eye this week.
All of us know that a calendar year is an arbitrary period over which to measure non-astronomical progress. That’s true whether you’re looking at an expanding portfolio or a shrinking waistline. Or, worse, the opposite!
Yet 90% of us do it anyway.
Far be it from me to take the high ground here. Not when one of my favourite rituals of the quiet New Year is resetting my return tracking spreadsheet.
I love pressure washing the slate clean. Percentages gained and lost and my benchmarks are zeroed. So too is the chunky annual expense tally that’s racked up by my naughty active style.
I try to be happy that my transaction taxes pay for a new nurse somewhere, and resolve to do better.
I also resolve to eat less fried food, and to read more books and fewer Tweets.
Money for nothing
If tracking annual returns is illogical, forecasting them is insanity.
Yet plenty of well-paid professionals do that, too.
As a financial media junkie, this time of the year sees me digest a hotpot of forecasts from everyone from hedge fund managers and market strategists to bank interns.
They aim to pin the tail on a donkey, by predicting where the world’s biggest stock market indices will sit in exactly 12 months.
Such precision is, of course, errant nonsense.
Nobody knows where the market will be tomorrow, next month, or in a year. Most market prediction methods don’t predict much of anything. Animal spirits loom large – not to mention pandemics caught from animals.
True, over the very long-term GDP growth and stock markets are related in healthy economies. Prices of assets ultimately follow earnings. The price you pay affects the returns you get, so valuation does matter.
But ‘ultimately’ is doing a lot of heavy lifting there. Think decades.
Short-term, anything can happen. For example, consider how the immense contraction in GDP in early 2020 foreshadowed a boom in shares. Nobody saw that coming. Just saying the world wasn’t ending felt contrarian enough.
Still, I’ve also mellowed about these market forecasts. It helps that wider scrutiny via the Internet means fewer people take these horoscopes as gospel nowadays.
Most market mystics just slap roughly 10% on to wherever the stock market sat at the end of the year just passed and call it job done. And in truth that’s about as good a guess as any.
There are more important things to be cross about than pragmatism.
Sultans of swing
Where the pundits do spin stories to justify their +10% forecast – beyond it being an (optimistic) historical near-norm, twiddled for inflation – you can also get an insight into what’s driving the big money.
It’s similar to how some stock pickers start with a company’s market cap, then work back to see what assumptions are being made about its earnings and growth. You can do the same with these wider prognostications.
In an era where people are flipping blockchain-ed JPGs of cartoon monkeys for millions of dollars on a daily basis, thinking about how the stock market might move over a long 12-month period – and why – seems almost sagely.
Right now investors seem to foresee rates rising, but at a moderate pace. Real yields are expected to remain low, historically-speaking. Quantitative tightening (yep, it’s a thing) should eventually drain some liquidity from the system, but it’s thought more normal economic conditions will pick up the slack. Crucially, inflation isn’t expected to run hot indefinitely.
That summary might not sound like anything to scare the horses. But it’s already been enough to crash the highly-rated ‘disruptive’ growth stocks that boomed during the pandemic.
As Michael Batnick points out:
The story that best encapsulates investor enthusiasm for growth stocks was when Zoom’s market cap crossed ExxonMobil [XOM], which traces its roots back to 1870.
When Zoom went public in 2019, XOM was 21x the size. And then, for one brief moment during the pandemic, Zoom took the lead. After the recent growth crash, Exxon is now 5.5x larger. Order has been restored to the galaxy.
Multiple compression has done a number on these stocks. The median price to sales ratio for ARKK names peaked in February at 33 (Zoom got up to 120) and is now down to 10.5.
So much for the highest-fliers. If anything they’re starting to look more like buys than sells to my spidey senses, if you’ve a long enough time horizon.
Your latest trick
A question mark also hangs over what we used to call ‘bond proxies’ in the old days. (You know, those ancient times before March 2020).
These are the high-quality, slower growers like Nestle and Diageo. The sort of companies beloved of star fund managers Nick Train and Terry Smith.
Shares in many such firms have been stagnant for a while but – especially outside of the UK – their valuations remain largely unattractive on a historical basis. Yet the same financial modeling that sees higher yields compressing racy tech stocks should also imply lower multiples for these chocolate makers and whiskey merchants, albeit not to the same degree. I’m watching these companies very closely for clues.
Then finally we have the value stocks – banks, miners, energy firms and the like.
The presumption is rising rates, inflation, and economic growth are good for these because future higher earnings aren’t so valuable as they are in a low-growth, low-yield world. Hence the market sees more rotation into such companies.
For what it’s worth (nothing) I’m not so sure. A lot of assumptions underpin that trade. I find it hard to be confident of an economic boom, with Covid still raging a year on from vaccine euphoria. I believe too that supply chains and consumers alike are getting better at dealing with the pandemic’s impacts. That’s one reason I don’t see high inflation persisting.
Brothers in arms
It’s possible – especially in European markets, which has less of a growth and tech focus – that money could continue to rotate from one kind of company and into another, and the market still head higher.
Individual fund manager or factor returns could crater, depending on style. But index investors might barely feel a flesh wound.
So will the market go up in 2022? Your guess is as good as mine.
Instead of an unsatisfactory answer, a better question: which market?
This graph from Visual Capitalist illustrates a wide variety of moves across asset classes in 2021:
That’s from the perspective of a US investor, but the message is universal.
Diversification potentially gives you more leg-ups and safety ropes in an uncertain future. Whereas betting on just UK value shares or US software-as-a-service or whatnot – or even only shares or cash – is exactly that. A gamble.
If you want more soothsaying for the year ahead, try Saxo Bank’s annual outrageous predictions. They’re tongue-in-cheek, and interesting.
The Slow & Steady Passive Portfolio update: Q4 2021 – Monevator
From the archive-ator: We’ve just lived through a ten-year bear market – Monevator
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UK house prices rise at fastest pace since 2007, but end to the boom in sight – Guardian
Millions more face fuel poverty, with average bill forecast to hit £2,240 by April – ThisIsMoney
HMRC temporarily waives late filing and payment charges on tax returns – Which
UK children to get inflation-busting pocket money boost – Guardian
How to get 62 days off work in 2022 by using only 26 days of annual leave – Mirror
London’s Crossrail is still uncertain on opening dates – New Civil Engineer
David Bowie’s estate has sold his back catalogue for at least $250m – Variety
Influencer who made £38,000 a week selling her farts in a jar is hospitalized; blames unsustainable withdrawal rate – Metro
Visualizing the $94 trillion global economy – Visual Capitalist
Products and services
Savings rates stuck at rock bottom despite BOE rate rise – ThisIsMoney
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Vanguard suffers a rare major website SNAFU – RIA Biz
Promo / free money Join the 400,000 people saving with a FSCS-protected Chip account, and we’ll both get a free £10. Download the Chip app here then head to the ‘Promos & Referrals’ section on your profile and enter the code CHIP-EBZ267
Converted homes for sale, in pictures – Guardian
Comment and opinion
10 things the FIRE gurus don’t want you to know – Early Retirement Now
For retirees, when inflation arrives is important – Morningstar
Who you should know – Humble Dollar
Feeling rich – Fire V London
The rise of the meme stock financiers – Wired
21 personal finance rules from a Harvard economist – CNBC
Reflections on three years of early retirement – Minafi
What if the bull market keeps going? – The Irrelevant Investor
Crypt o’ crypto
Unrest in Kazakhstan deals a blow to global Bitcoin mining – Guardian
GameStop shares surge on plans for an NFT marketplace – Ars Technica
Bitcoin could hit $100,000 in five years, says Goldman Sachs – ThisIsMoney
Naughty corner: Active antics
Rising energy prices could upset the stock market, so hedge by owning energy firms [Search result] – FT
Cathie Wood makes the case again for disruptive growth [Video] – via YouTube
How institutions like pensions might better pick fund managers – Verdad
Why it could be a better time to bet against Buffett… – Compound Advisors
… but maybe not Berkshire Hathaway – The Belle Curve
Stock market history, illuminated – Albert Bridge Capital
New year, old case for value vs growth divergence closing – bps and pieces
So there’s a Groundhog Day anomaly [Research] – Science Direct
Upgrade your life in 2022 mini-special
Sleep more – Humble Dollar
100 ways to slightly improve your life without really trying – The Guardian
Lessons from an 85-year old aunt – Flow
Dare to dream – Banker on FIRE
How to live a rich life – I Will Teach You To Be Rich
Give your money. Give your time. Don’t tell anyone – The Atlantic
Latest data from London offers glimmer of hope in Omicron wave… – Sky
…though this scary thread collates research about long Covid… – via Twitter
…and more on the downside of Omicron as a ‘pandemic killer’ – Infection Control Today
Moderna CEO says fourth Covid shot may be needed later this year – CNBC
Dear Djokovic: patience with vaccine sceptics is wearing thin – Guardian
Upgrade your mask – N.Y. Mag
Omicron may not be the final variant, but it may be the final variant of concern – The Conversation
Kindle book bargains
Mastering the Market Cycle by Howard Marks – £0.99 on Kindle
The 5AM Club: Own Your Morning by Robin Sharma – £0.99 on Kindle
Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle
A history of plastic, and its polluting future – The Atlantic
The return of the urban firestorm – N.Y. Mag
Australian frogs hurt by disease and climate change – Gloucester Advocate
Human brain drains mini-special
Do Your Own Research? – New York Times
Does not compute – Morgan Housel
Off our beat
Five lessons humans can learn from dogs – Undercover Fund Manager
Skateboarding in middle-age – Guardian
This 30-year old’s company makes millions flipping Walmart clearance aisle products on Amazon – CNBC
Five ways the Internet era has changed British English – The Conversation
“Remember that the only purpose of money is to get you what you want, so think hard about what you value and put it above money. How much would you sell a good relationship for? There’s not enough money in the world to get you to part with a valued relationship.”
– Ray Dalio, Principles
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