Some of you have recently asked for our opinion on the financial markets and trends. Let me present here our view.
As you can see on the chart in the pdf file attached, the S&P 500 has almost doubled (close to +100%) since its bottom on March 9th, 2009 (24 months). Also note that the average bull market lasts 57 months with a 164% average increase.
The current rally represents the 3rd greatest percentage gain for any 23 month period in the index’s history (chart attached as of 02/2011). It was preceded by the 2nd worst 23 month drawdown, only bettered by the 1929 – 1932 crash and the index is still actually lower than it was 46 months ago (it closed at 1445 on April 9th 2007), meaning that this drawdown is yet to be fully repaired, while both corporate earnings and outlooks are much healthier at present.
| Bull View
|| The market should continue to rise in the next couple of years due to good valuation vs. bonds/cash, the market has a free cash flow yield close to 7%, which is the highest in history and balance sheets and has never been better.
Furthermore, confidence, consumer spending, hiring, and the availability of credit are increasing and equity funds would see inflows.
| Bear View
||Structural issues in our economy like debt, unemployment, real estate prices would most likely persist. Rising oil and commodity prices may be due in part by the additional liquidity provided by the quantitative easing 2 of the Federal Reserve.
| Overall View
|| As a believer in reversion to the mean, we think that the next decade should be a positive one for stocks though return opportunities are not what they were two years ago.
For the next three to five years, returns on an annualized basis may not be as good as the last two years. There will be corrections which should create opportunities to increase our equities exposure. So while we think that returns will remain positive, volatility will be present.
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Japan Disaster Thoughts
First, we offer our most heartfelt condolences to all those who lost their lives, to their families, and to all those now in unbearable circumstances. Placing numerical values on the economic losses is an intolerable insult to all those who lost their lives and to their families and relatives, and is morally indefensible.
Uncertainty is the operative word in Japan, but as we take a step back and think about the broader economic impact, it’s worth noting that this natural disaster is happening at a time when the U.S. data looks solid (good valuation vs. bonds/cash, the market has a free cash flow yield close to 7%, among the highest in history, and balance sheets have never been better, confidence, consumer spending, hiring, and the availability of credit are increasing, and equity funds see inflows).
It is very difficult to quantify the long term impact of the Japanese disasters at this stage. Hence we should not make any formal changes to portfolios at this point. The portfolio managers of the international funds you may be invested in, are making changes in the funds if they believe they are necessary.
Japan today accounts for a smaller share of the global economy than at any time since the 1970s – 5.8%, compared to 7.5% a decade ago and more than 9% in the early 1990s. (Source: IMF, WSJ)
US send 7% of exported goods and services to Japan (one-fifth as much as exports to European Union). The entirety of American exports to Japan account for less than 1% of the total U.S. economy. (Source: U.S. Department of Commerce, WSJ)
Japan's stock market, which twenty years ago was the most valuable in the world, today accounts for a smaller share of global equity values than at any time in decades. On the eve of the Kobe earthquake in 1995, it accounted for nearly 30% of world stock market values. Today, just 7.5%. (Source: WSJ)
It may be more of a human story than a big economic story (like 1929-1945-1973-1987-2001-2008…).
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PS: Please find below a link for a video on the surprising truth about what motivates us http://www.youtube.com/watch?v=u6XAPnuFjJc