Stock market news – the FED, interest rates and global economic slowdown

Today we are going to talk about the economy and how it affects us investors and what to expect in the next 20 years! The news of the week was that the FED that will keep interest rates low:

1 FOMC

And the second very important news is that the global economy is slowing down and the growth is lowest since the financial crisis!

global economy, what will you focus on

Source: Bloomberg

How does that affect our investing? Is it important at all?

Let’s start with the FED, some think the current interest rate is close to the neutral rate and that should be it.

2 neutral rate

Source: Oxford Economic

Plus, that last interest rate hikes, have slowed down economic growth in the United states but have brought it to what is expected to be normal long term.

3 us growth

Source: Trading Economics

What does it all mean for investors?

Well, the FED will protect you as much as it can and as in Europe, they will do whatever it takes to keep the situation calm. As long as we don’t have inflation things will be good. Plus, it is hard to have inflation when there is so much supply of everything due to the same low interest rates.

However, lower interest rates just postpone the inevitable, which is that the economy is always cyclical and after all it all boils down to productivity. Policy can influence growth in the short term, prevent crises, which also means you can’t time a crisis. Nobody knows what kind of recession will come next and when it will strike.

Postponing means that you might make 20% per year for 5 years and then lose just 20% in one year when there is a recession. The point is that even if it all looks terrible in the form of high debt, low interest rates, it might go on for a decade, or inflation might change things. Therefore, try to find both good investments and protection in case of inflation. The best investments will always be quality.

Global economic situation

On a possible global recession, and something to keep in mind also when watching the specific country growth rates, on one side we will have the slowest global growth since the financial crisis but on the other hand, global growth has been 3% compounded over the last 10 years.

The average since 2000 is probably 4%. This means that over the last 20 years, despite the global financial crisis in 2009, the global economy more than doubled. It will probably double again in the next 20 years and there will probably be one or two recessions. Keep that in mind when investing.

What did stocks do over the last 20 years? Stock doubled!

4 doubled

Source: Macrotrends

Given that the current PE ratio, in the lowest tax environment I expect we are going to see going forward.

6 corporate tax

Source: Wiki

But even if taxes go up, the difference in return will be 1% or something per year, not significant and something not to worry even if the media has already started talking about it.

5 pe ratio

Source: Multpl

I would say, passive investors should expect their money to double over the next 20 years, perhaps a bit more than that with significant ups and downs during the period.

How to invest for the long term?

If you want higher returns, from these levels I think one can easily beat the S&P 500 and other indexes because it was a hard thing to do from 1982 when the PE ratio was 7, thus the return 15%. Now that the return is around 5%, by looking at businesses that offer more, you can do that over the next 20 years. What is the difference?

$100 * 1.05^20 = $265

$100 * 1.1^20 = $672

$100 * 1.15^20 = $1636

My mission is to help those who want more than 5% per year.

The message is simple and I will never get tired of repeating it because it is so important:

Invest in value that will give you a good return over the long time, that will benefit from the fact that the global economy will probably double over the next 20 years and that gives you a margin of safety.

You might buy an airport, fertilizer stocks that we will discuss on Sunday or who knows what. But keep those things in mind. The global economy will double in the next 20 years, no matter the news. Some businesses with quadruple, some will go bust, looking long term, you have a chance to find those that will quadruple.

Long term investing is the most important advantage we have. It allows us to take advantage of the irrationalities that emerge from Wall Street’s and everyone’s focus on the short term.

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Stock Market News – Forget About News

Stock Market News – Stocks might crash, recession ahead, so what?

Will there be a stock market crash, will there be a recession? In this article I’ll show you why it doesn’t really matter and what are the real things you should focus on!

We will discuss:

Contents

Politics and economic news vs. business news

Earnings are the key, not economics

Market valuations

Will there be a crash?

Earnings and volatility

How to take advantage of volatility

Invest when you are happy with the business earnings

 

Politics and economic news vs. business news

Over the past years, I’ve been making some macroeconomic videos, I like the mental exercise, analysing the long-term risks etc. However, I must say, all that ‘mumbo jumbo’; GDP, economy, debt, trade wars, employment, housing etc. hasn’t helped me at all when it comes to investing. I am subscribed to an economic newsletter from the Wall Street Journal and in the last 4 weeks there were two positive and two negative headlines all about the US housing market, so funny.

The fact is that companies are living beings that adapt to circumstances, grow and change over time. By looking at the business, not the economy is actually where I get my investing value. As I am really pushing on the research, more and more of it will be business specific and less macro. Although macro is fun to look at, discuss and you can talk about it for eternity, talking about it doesn’t really help your portfolio.

For example, the S&P 500 has been flat since January 2018.

news

Source: CNN Money S&P 500

The point is that nobody could have predicted where the S&P 500 could have gone, it could have been up 20% or down 30%. It is all a guess, no matter how much macro you study. The point is that we have to focus on the business, nothing else.

I’ll take this opportunity to discuss the real news and news that could be important for your portfolio.

  • Extremely important news 1: your long-term investment returns are driven by earnings

Earnings are the key, not economics

In 1999, S&P 500 earnings were 58.55 points. Today we are at 130 points. That is an increase of 122%.

2 S&P 500 earnings

Source: Multpl

How did the market do? Well, the S&P 500 was at 1282 points in 1999 and now it is at 2757 points, up 115%.

3 s&P 500

Earnings are up 122% and the market is up 115% over the last 20 years. In the mean time we have had the dot-com bubble crash, the great recession, a European crisis, Japan not growing anymore, a commodity boom and bust etc. Who knows what will we have in the next 20 years, but no matter what happens, good businesses will do well. Another thing that helps very much with determining stock market returns are valuations.

  • Keep an eye on valuations because the market is extremely differentiated

Market valuations

In 1999 the S&P 500 was at 1282 points with earnings of 58.55 that leads to a PE ratio of 22. Thus, the earnings yield is approximately 4.5%.

1282*1.045^20= 3091 points

According to the valuation, investors could have expected a return of 4.5% based on the valuation they were paying in 1999. The return was even a bit higher when you add the dividends of just below 2% per year.

4 s&P 500 dividend yield

Source: Multpl

The current market’s valuation is 21, so your expected long term investing yield should be around 4.5% as it was in the last 20 years.

5 S&P 500 pe ratio

Source: Multpl

Will there be a crash?

There will definitely be market crashes in the future but you can’t time them. Let’s say there is a crash of 30% 6 years from now but in the meantime, the S&P 500 grows at 5% per year. This would say that from the current 2757, the S&P 500 would go to 3694 points. If then it crashes 30%, we would be down to 2585 but by waiting for the crash you would have missed on the dividends so you wouldn’t be ahead. However, as we spoke that earnings are key, you can invest for higher than 4.5% returns by investing in earnings and taking advantage of the volatility.

  • The market is extremely differentiated and volatile – learn about the business

Earnings and volatility

If I look at the top 10 positions of the S&P 500, the PE ratios vary extremely and I can tell you that returns will vary extremely over the next 20 years.

6 pe ratio

Source: IVV

If we take a look at the top 10 S&P 500 holdings from 20 years ago, only two companies were there that are still in it.

7 top 10 1999

Source: ETFDB

Therefore, it is extremely important to look at try to understand where could your investment be in the next 20 years. This doesn’t mean that if a company falls out the top 10 it will be a bad investment. However, you can avoid buying companies with too stretched price to sales ratios and extremely high earnings valuations where the actual business doesn’t justify.

The point is that when you follow a company for a few years you begin to understand it much better than the media does, you understand its natural cycles and how to invest around those.

This allows you to take advantage of volatility. It is pretty simple if you have a long term view.

How to take advantage of volatility

The easiest was to take advantage of volatility is to rebalance your positions in relation to the earnings yield those offer.

8 rebalancing

The only problem is that you have to move your focus away from the news and future expected earnings and simply focus on the real current business earnings. Just 6 months ago, Apple’s stock was above $232 only to fall down to $142 in January and now rebound to $173. Apple’s earnings didn’t change that much, so if you focus on the earnings yield you can buy more when the earnings yield is higher, PE lower, and less when the yield is lower, thus the PE ratio higher.

I didn’t buy Apple, but in the summer of 2018 I invested a bit in Brazil because I did find an interesting business there.

9 brazil

Source: EWZ

I didn’t sell yet, but the increase in price gives me a nice thing to think about and see how it fits my portfolio. The point is that it is all easy when you invest in businesses. Which leads me to the most important news of all:

  • Invest in the business, be an owner

Invest when you are happy with the business earnings

By focusing on the earnings and not on the news, investing becomes easy. What is your required investment return?

4.5% – buy the S&P 500 and forget about it

7% – buy good businesses when their PE ratios are around 14

10% – same but at PE ratio of 10, or higher ratios buy with some growth

15% – look at good businesses in distressed sectors, value investments and take advantage of the market’s short term focus. This implies a lot of work but it is possible to find such opportunities.

To summarize:

  • Forget about news, focus on the business reality, the long-term reality
  • Earnings are the drivers of your investment returns, be a business owner
  • Focusing on earnings will allow you to take advantage of the market’s irrationality, or better to say volatility

News, economy, stock market crash, recession, GDP, Trump – not adding value to your investing, so focus on the business and that is what we do here, so please SUBSCRIBE!

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