As the stock market has corrected over the last few weeks, investors are inquiring in one fashion or another about whether they are doing the right thing continuing to hold equities. Some question whether to liquidate US equities or sell all Canadian equities and move to cash. Others get directly to the point and ask bluntly, “Is holding equities a good idea?”
This unease and worry bring us back to the title of this Newsletter. Most of these investors had donned their life jackets and, if enabled, would have jumped overboard into “a life boat of cash”. However, an experienced Captain would not issue a call to abandon ship and lower the life boats, knowing very well that the turbulence that we’ve recently experienced is well within the norm.
Experience and the Economic Data Reveal:
The average intra year decline in the S&P 500 is 14% from peak to subsequent trough. The S&P 500 has not yet broken through this normal, average correction. As Nick Murray, a respected adviser, commented “That the Index could still have failed to ring up an average correction with the energy and commodity sectors getting disemboweled as they have been is a huge testament to the inherent stability and enduring value of the rest of the five hundred companies.” It should be noted that expectations are that the earnings reported by the S&P 500 for 2016 will grow about 4% over 2015’s earnings even including the weak energy sector. Also, better than a majority of companies that have reported so far this earnings season have beaten market expectations.
According to Jeremy Siegel of Wharton School of Business and author of Stocks for the Long Run, in November the S&P 500 was sitting almost bang on its long term average value, despite extremely low interest rates which should cause equities to attract higher than normal valuations. Since Siegel’s presentation the S&P 500 has declined 9.4% pushing stocks into bargain territory. Siegel commented on February 8th, 2016, that “price-to earnings ratios are “extremely reasonable” on a historical basis” (Source: www.cnbc.com).
Morningstar, the independent research company, says that the average stock in its universe is trading today at a 12% discount to Morningstar’s fair value estimate.
Pacific Spirit’s research shows more stocks in our Buy zone than at any time in past few years.
The US economy is generating hundreds of thousands of new jobs monthly resulting in the US unemployment rate declining. This creates a virtuous cycle as each of these new jobs generates income for families who, in turn, go out and shop, creating even more demand for new employees.
Few of the usual markers of a market top are present – retail investors are scared, cash remains on the sidelines, and individual investors are not certain that they can do better than the experts. The American Association of Individual Investors’ Investor Sentiment Survey has moved markedly more bearish, which historically has been a strong buy signal. The market “climbs a wall of worry” and there is a lot of worry out there to climb.
Seeking refuge in the illusionary life boat of cash (i.e. market timing) historically has caused investors to significantly under-perform the client who stays the course and remains invested. If you have ever been to Deep Cove Daze in North Vancouver you will know how quickly a boat made from paper (cardboard) takes on water.
Long Term Investing
Investing in equities can be uncomfortable at times. Yes, it is OK to have these feelings and to acknowledge them, but it isn’t OK to act on these feelings as to do so will most certainly result in a less fruitful long-term.
Conservative investors whose portfolios are invested based on their risk tolerance, time horizon and other unique circumstances and whose equity portion is invested in quality growth companies should view times like these as an opportunity to purchase more great companies that are on sale.
An experience portfolio manager should help you initially set your course and then assist you in navigating through difficult and confusing times like these in order to reach your financial goals.