Dear Clients and Friends,
For this weekend’s reading, I wanted to discuss very briefly the current market conditions, most notably the new highs, and reiterate both our mid-term and longer-term forecasts. After which, I’m itching to discuss Warren Buffet’s comments of this past Wednesday when he predicted that the Dow Jones Industrial Average, in 100 years, will reach 1 Million!!! Has the old man lost it? Not even remotely. But we’ll get to that in a moment.
On June 18th, 2017, MOR Wealth Management published an article focusing on our mid-term forecast of a recession likely to occur between late-2018 and mid-2019. Therein, we also included a short-term guestimate that the market would increase 6%-16% prior to this recession. Side note- you may ask yourself why I refer to our mid-term vision as a forecast, and our short-term vision as a guestimate. Word crafting or not, only a fool would give considerable credit to a “short term” forecast. As the famous economist John Galbraith once said, “The function of [short term] economic forecasting is to make astrology look respectable.” That said, at the time of publishing, we did believe this to be our best estimate of coming market movements, and so we’ll stick with it for better or for worse.
Since June 18th, the S&P 500 has already produced 2.5% total return of this 6%, and many people are asking why the market continues to hit new highs. We believe that there are many reasons the pendulum continues to swing in the positive direction, not least of which is old fashioned momentum. There are plenty of technical reasons as well. For example, job growth, the primary driver of a consumption based economy, is currently very healthy. While wage growth has been a drag for every class of citizens except the ultra-wealthy, when you compare the number of job openings to the number of unemployed persons, the ratio is actually approaching 1:1 as we see in the graph below.
Unfortunately, for almost every encouraging statistic we study, we find another one that frightens me to the core. Let’s look at valuations for example. The Shiller price/earnings ratio now sits around 30. The historic average since the late 1800’s is roughly 16.5, which is almost 50% lower than it is right now. Post WWII average is around 19, which is still considerably lower than it is right now. Could earnings (the “E” in the P/E ratio) catch up to stock prices (the “P” in the P/E ratio) and wash out this historic over-valuation? Perhaps, but even if that were to occur, that would mean the “P” (stock price) would have to stay stationary, which does us investors no good.
Albeit much more simplified than the novel we wrote back in June, our purpose today is to reiterate our short-term guestimates and our mid-term forecasts. And to continue to offer insight into our reasoning.
Now onto the fun part...
On Wednesday, Warren Buffett claimed the Dow is going to one million! Even though he said it may take 100 years, the public is giving him an awful lot of flak about considering such an outlandish valuation of the investment markets. Here’s how obtuse the general public is... that crazy prediction only requires a 3.87% annualized average rate of return over those 100 years. Possible? Likely, actually. In fact, with a 5% annualized return, the Dow will hit 3 million in that time frame. So here we go folks, I’m going to try to “one-up” the famous Warren Buffett. MOR Wealth Management predicts that the Dow Jones Industrial average will cross 3 million by September 22nd, 2117.
Buffett’s comments were less a prediction than a statement. We needn’t be distracted by short term volatility. We shouldn’t fear recessions, instead we should tolerate them. We should, on the other hand, stay focused on the long, long, long term, and maintain discipline during the entire journey. For those who want to gamble with their money, I suggest a trip to Vegas. For my clients and friends who are long term thinkers, I’m sticking around for Dow 3,000,000!
Have a lovely weekend!
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
1801 Market Street, Suite 2435 Philadelphia, PA 19103 P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
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The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency.
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.