Today’s Stock Market Illusions

My recent reads have been stuck in the 1960s, including Adam Smith’s The Money Game and Andrew Knowton’s Shaking the Money Tree. Both are fascinating reads into the psychology of the 1960s. They are not looking back like John Brooks’s The Go-Go Years (a good read as well) but instead share with the readers exactly what investors were thinking at the time. The 1960s didn’t set up investors for the decade they thought they would get. Instead, it gave them the 1970’s. The success ahead was an illusion in stock returns, not corporate growth. I’d like to use this piece to look at some of the illusions that will stalk investors and produce stock market failure in the next decade.

This could be the roaring 1920’s!

This has been an idea peddled by a handful of investors and strategists over the last few months. The idea is simple. The Spanish Flu ravaged the world from 1918 to 1920. We followed that pandemic/economic problem with a decade of stock market returns that was one for the ages. U.S. stocks returned 15%-16% compounded during the decade. Dividends produced over 40% of that decade’s total return, compounding at 6.3% annualized returns in dividends alone.

Let’s take a look at today’s market. Yes, we’ve had a pandemic that has shaken up consumers and the world economy. Today’s S&P 500 dividend sits at 1.4%. From this starting point, it would take an act of God to produce returns from dividends yielding 6.3% compounded over the next 10 years. For believers in this, my best recommendation is prayer. A four to five-fold increase in dividends has never happened in a decade. Further, Robert Shiller’s CAPE Ratio started the decade from low places in 1920. We can’t say that today. As you can understand, we think this theory is adorable.

There are unstoppable businesses out there

Mark Hulbert wrote a great opinion piece on May 20, 2021, for MarketWatch where he quoted some of the work done by Vincent Deluard at the investment firm StoneX. Mr. Deluard analyzed 351 companies in the Russell 3000 that traded for more than 10 times sales. In comparison, the price-to-sales ratio for the S&P 500 Index is 3.0. He then looked at the unstoppable businesses out there: Microsoft, Apple, Google, and Amazon. He noted these companies have grown revenues at 26% annualized on average over the past 17 years and trade at price-to-sales ratios averaging 6.4.

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Disclosure: The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and ...

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