Personal Finance
At the end of last year, the Federal Reserve Bank of San Francisco published a paper* on historical rates of return of major assets. The particularly interesting aspect of this paper was the exhaustive lengths that team went through to assemble a truly impressive database of returns across developed nations stretching back almost 150 years. After the extraordinary returns seen last year from US equities, we think it is worthwhile to take a moment and recalibrate expectations around what might be considered “more normal” in a long-run historical context.
It turns out that the long-run average equity return has been just over 10% since 1870 across developed nations (Figure 1), and it is something closer to that which we should be expecting this year, rather than a repeat of the 22% returns seen last year.
More than that, however, the report shows that the proportion of investible assets across developed countries is roughly 25% in equities (Figure 3). In the US, however, that proportion is much higher at roughly 40%. The equity gains seen last year will therefore likely fuel consumption going forward disproportionately in the US rather than other developed nations.
Perhaps the other notable deviation from the normal is the UK, where the proportion of investible assets held in real estate is 27% compared to the average which is just 20%. The UK real estate market has been held back significantly since BREXIT, and that will no doubt be yet another factor holding back the UK consumer as wealth effects remain muted.
The report also shows that average returns from real estate and equities have been roughly similar, but equity volatility has been twice that of real estate (Figure 1). Part of the difference can be explained by the way in which the data has been collected – a more comparable method (year average returns for equities rather than year-end returns) would lower equity volatility by roughly one fifth. We suspect that real estate markets by their very nature also hide true price discovery on a real-time basis because transactions are so infrequent, and that is one reason why REITS are so much more volatile than real estate price indices.
Nevertheless, real estate investing seems to make sense for many households over and above equity investing for other practical reasons too. It is much easier to lever investment into real estate than equities, and there are obvious non-price utility gains from owning real estate, often combined with favourable tax treatments to gains from real estate (particularly if a primary residence).
In addition, the study by the San Francisco Federal Reserve noted another interesting comparison between equities and real estate, which has been the low level of co-variance or correlation between real estate investments across different countries as opposed to equities. For investors looking to reduce the correlation of returns within their portfolios, international real estate compares well in this report, and is something to which we plan to examine more closely in the future.
For now, we can’t help but recognize how this year has started in much the same way as the last one ended. US equities are up more than 5% in the first few weeks of the year. As bullish as we are on the coordinated global growth outlook, we suggest that this pace of return can’t last forever, and that investors should be recalibrating expectations back down towards longer-term averages.
Brent Woyat, CIM, CMT
Investment Advisor, Portfolio Manager
Canaccord Genuity Wealth Management
T: 604.699.0869 | F: 604.643.1802
www.brentwoyat.com
All information is given as of the date appearing in this document and Canaccord Genuity Wealth Management (CGWM) does not assume any obligation to update it or to advise on further developments related. All this information has been compiled from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do CGWM assume any liability.
All views expressed in this document are provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities. The statements expressed herein are not intended to provide tax, legal or financial advice, and under no circumstances should be construed as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation to clients and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person.
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DOW – 4 on 625 net advances
NASDAQ COMP + 52 on 305 net advances
SHORT TERM TREND Bullish
INTERMEDIATE TERM Bullish
STOCKS: The Dow was down, but most indices were higher. The NASDAQ was a star, helped by a stellar performance by Netflix and the high techs.
Our job is very simple. We keep raising our stops on trading positions and let this monster take us where it will.
GOLD: Gold jumped $8 to a new rally high. The sagging dollar was a factor.
CHART: We had been concerned about breadth as the averages appeared to be leaving the advance decline line behind. But now it appears that this consolidation is over and breadth has now broken to a new all time high.
As usual, there are concerns. The S&P is very extended and the CBOE put call ratio was very low today. We would not be surprised by a bit of short term weakness, but the chart pattern remains bullish.
BOTTOM LINE: (Trading)
Our intermediate term system is on a buy.
System 7 We are long the SSO from 110.59. Move your stop to 120.59.
System 9 On a buy signal from Dec. 29.
NEWS AND FUNDAMENTALS: There were no economic releases of consequence on Tuesday. On Wednesday we get the PMI Composite Flash, existing home sales and oil inventories.
INTERESTING STUFF: I attribute the little I know to my not having been ashamed to ask for information, and to my rule of conversing with all descriptions of men on those topics that form their own peculiar professions and pursuits. ———John Locke
TORONTO EXCHANGE: Toronto gained 10.
BONDS: Bonds rebounded slightly.
THE REST: The dollar hit another new low. Crude oil surged to a new rally high.
Bonds –Bearish as of Jan. 9.
U.S. dollar – Bearish as of Jan 12.
Euro — Bullish as of Jan 12.
Gold —-Bullish as of Jan 12.
Silver—- Bullish as of Jan 12.
Crude oil —-Bullish as of Dec. 26.
Toronto Stock Exchange—- Bullish as of September 20, 2017.
We are on a long term buy signal for the markets of the U.S., Canada, Britain, Germany and France.
Monetary conditions (+2 means the Fed is actively dropping rates; +1 means a bias toward easing. 0 means neutral, -1 means a bias toward tightening, -2 means actively raising rates). RSI (30 or below is oversold, 80 or above is overbought). McClellan Oscillator ( minus 100 is oversold. Plus 100 is overbought). Composite Gauge (5 or below is negative, 13 or above is positive). Composite Gauge five day m.a. (8.0 or below is overbought. 13.0 or above is oversold). CBOE Put Call Ratio ( .80 or below is a negative. 1.00 or above is a positive). Volatility Index, VIX (low teens bearish, high twenties bullish), VIX % single day change. + 5 or greater bullish. -5 or less, bearish. VIX % change 5 day m.a. +3.0 or above bullish, -3.0 or below, bearish. Advances minus declines three day m.a.( +500 is bearish. – 500 is bullish). Supply Demand 5 day m.a. (.45 or below is a positive. .80 or above is a negative). Trading Index (TRIN) 1.40 or above bullish. No level for bearish.
No guarantees are made. Traders can and do lose money. The publisher may take positions in recommended securities.
In a conversation with the master jazz musician and Pulitzer Prize-winning composer Wynton Marsalis, he told me, “You need to have some restrictions in jazz. Anyone can improvise with no restrictions, but that’s not jazz. Jazz always has some restrictions. Otherwise it might sound like noise.” The ability to improvise, he said, comes from fundamental knowledge, and this knowledge “limits the choices you can make and will make. Knowledge is always important where there’s a choice.” – The Art of Choosing, Sheena Iyengar
We have all been taught to “play by the rules” since the very beginning of our lives. Our parents did the best they could to teach us rules of proper behavior. That list of rules continued to grow longer the older we got, governing our day to day interactions with others. However, each of us has learned that in many instances rules can and should be changed. It just takes an overwhelming amount of effort to do so, and leaves those attempting to enact that change open to bullying by the status quo.
Investment advisors, since 1940, have been subject to the legal rules established in the Investment Advisors Act, which spells out the fiduciary duties they have to their clients. Since then, the basis for these underlying fiduciary rules has not changed much. However, due to the rapid development of statistical analysis based on more powerful computer capabilities, academic finance has greatly changed what is today considered “correct and reliable” investment portfolio management rules. As a long time practitioner I have learned enough to know there are no reliable universal rules, and those willing to put complete faith in such rules will end up losing at some point.
One academic I have followed over the years is Dr. Andrew W. Lo, the Charles E. and Susan T. Harris Professor at MIT Sloan School of Management. Most of his academic work in the world of finance is not something an average investor would enjoy, let alone comprehend, but for those who want to take on the challenge, I would recommend it. For the rest of us, his book Adaptive Markets is full of stories with purpose and meaning that are easily understood by both professionals and non-professionals.
Though I recommend the book, that does not mean I am in full agreement with his Adaptive Markets Hypothesis. However I do take pleasure in knowing that there is someone of stature who is pushing for change in the status quo. I want to highlight the principles Lo discusses in Chapter 8 of his book. First, I’ll share his “Core Beliefs and Principles of the Traditional Investment Paradigm Spawned by the Efficient Markets Hypothesis.” Lo says “These are the convictions held not just by finance professors, but also by investment managers, brokers, and financial advisers.” I agree that these are guiding rules for most in the investment world, though I hold myself out as an exception.
Core Beliefs and Principles of the Traditional Investment Paradigm
Principle 1: The Risk/Reward Trade-Off. There’s a positive association between risk and reward among all financial investments. Assets with higher reward also have higher risk.
Principle 2: Alpha, Beta, and the CAPM. The expected return of an investment is linearly related to its risk (in other words, plotting risk versus expected return on a graph should show a straight line), and is governed by an economic model known as the Capital Asset Pricing Model, or CAPM.
Principle 3: Portfolio Optimization and Passive Investing. Using statistical estimates derived from Principle 2 and the CAPM, portfolio managers can construct diversified long-only portfolios of financial assets that offer investors attractive risk-adjusted rates of return at low cost.
Principle 4: Asset Allocation. Choosing how much to invest in broad asset classes is more important than picking individual securities, so that asset allocation decision is sufficient for managing risk of an investor’s savings.
Principle 5: Stocks for the Long Run. Investors should hold mostly equities for the long run.
The almost universal acceptance of these principles may actually have the opposite effect: lessening returns over time. Take Principle 4, which emphasizes asset classes over individual securities. This completely removes the investor’s connection of her investment to the very real operating business she owns, or the actual entity she is lending money to. By default, this could encourage speculation based more on fear and greed than on the fundamental relationship between price and value.
Dr. Lo’s Adaptive Market Hypothesis attempts to address behavior. Here is his “adaptive” approach to the above five principles.
The Five Principles of the Traditional Investment Paradigm from the Perspective of Adaptive Markets
Principle 1A: The Risk/Reward Trade-Off. During normal market conditions, there’s a positive association between risk and reward among all financial investments. However, when the population of investors is dominated by individuals facing extreme financial threats, they can act in concert and irrationally, in which case risk will be punished. These periods can last for months or, in extreme cases, for decades.
Principle 2A: Alpha, Beta, and the CAPM. The CAPM and related linear factor models are useful inputs for portfolio management, but they rely on several key economic and statistical assumptions that may be poor approximations in certain market environments. Knowing the environment and population dynamics of market participants may be more important than any single factor model.
Principle 3A: Portfolio Optimization and Passive Investing. Portfolio optimization tools are only useful if the assumptions of stationarity and rationality are good approximations to reality. The notion of passive investing is changing due to technological advances, and risk management should be a higher priority, even for passive index funds.
Principle 4A: Asset Allocation. The boundaries between asset classes are becoming blurred, as macro factors and new financial institutions create links and contagion across previously unrelated assets. Managing risk through asset allocation is no longer as effective today as it was during the Great Modulation.
Principle 5A: Stocks for the Long Run. Equities do offer attractive returns over the very long run, but few investors can afford to wait it out. Over more realistic investment horizons, the chances of loss are significantly greater, so investors need to be more proactive about managing their risk.
As you read these Principles, I believe you will find merit in Dr. Lo’s adaptation. I know I do, and I hope other academics will take up the cause and expand this research. Principle 1A is one to take note of, as I believe it has particular merit today, although in opposite of what most of us would think. We know that investors will act in concert irrationally during times of extreme financial threats; just think back to 2008 and early 2009. Not only did individuals act irrationally, but a very large portion of institutions did the very same, joining the largest club of investors in the world, the Buy High Sell Low Club.
Today I believe the next membership drive is about to start. To be a member of this club you must begin with buying high. Dr. Lo’s Principal 1A states investors will act irrationally due to financial threats, but the threat today is not a fear of losing money. In fact, it’s just the opposite; fear of not making any money when all your friends and peers are. Wall Street affectionately calls this FOMO, or the “Fear of Missing Out.”
I have experienced this in previous bull markets. We just hope this time it is not as disappointing as the last FOMO market in common stocks from 1998 to 2000. The results were disappointing to those who jumped on the bandwagon late in the game. In the ten years beginning on January 1, 2000 and ending on December 31st 2010, the S&P 500’s annualized return, including the reinvestment of dividends, was just 0.36%. We may have just seen the beginning of the next round of a FOMO market, or maybe it is just a false start. Time will tell.
Until next time,
Kendall
Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirement for advisors. This commentary is for informational purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part 2 to a client in an authorized jurisdiction and receive a properly executed Investment Supervisory Services Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs’ Investment Objectives, individual account, individual security or index. Upon request, Anderson Griggs Investments will provide to you a list of all trade recommendations made by us for the immediately preceding 12 months. The authors of publications are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Investments’ office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.
On the seventh day of the seventh month in the north of Spain, you will see about 3,000 men — some old, mostly young, all brave — gather in the town of Pamplona.
They are there for the nine-day Festival of San Fermín. They are there to run with the bulls.
Running with the bulls at Pamplona isn’t for the lily-livered. Ernest Hemingway described it this way: “It’s like being shot at, and missed!”
But now, you don’t have to risk a horn though the guts to run with the bulls. What’s more, you can make a mountain of money, doing it, too.
I’m talking about the great, big, snorting bull market right in front of you …
The bull market in commodities is pawing the ground and ready to roar. Just look at this chart of the Thomson Reuters Commodity CRB Index. Or the CRB Index (NYBOT: CRB), for short.
There are many kinds of bulls in Pamplona. And the CRB Index is comprised of 19 different types of commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, wheat. But its weighted toward energy (33%).
The important point is that ALL the bulls are running. Some will run faster; some will run slower. If you can grab on to a fast bull, you can go very far indeed.
How far? This cup-and-handle pattern on the chart gives us a minimum target that is 11% higher from recent prices.
Stocks that are leveraged to commodities can do much better.
Now, what if I told you there is a massive force that is putting Tabasco under the tails of these bulls? It’s a potent mixture … one that could spur these bulls to run further and faster than many dream possible.
It’s in this chart right here …
The chart shows us that commodities haven’t been this cheap compared to stocks since 1999. A generation is 25 years. So, this is as close as we’ll get to a once-in-a-generation buying opportunity.
“Once in a Generation!” Hey, if you’re going to run with the bulls, that’s when you want to do it. When the risk/reward is tipped heavily in your favor. When those bulls are so hungry, they will roar and charge down the street like rolling thunder.
Here are some of the bulls leading the pack …
Energy Metals
I’m talking lithium and cobalt, sure. They’re the metals powering the electric vehicle (EV) revolution. But also nickel and copper. Heck, an EV car has, on average, four times as much copper wiring as an internal combustion engine (ICE) car.
We’re at the dawn of the EV age. The growth rates for both EV vehicles and demand for the metals that go into EV batteries are awesome. The International Energy Agency estimates that there will be 50 million electric vehicles on the road by 2025 … and 300 million by 2040. That’s up from closer to 2 million now.
Oil and Gas
Just because EV cars are coming in doesn’t mean gasoline-powered cars are going away. Everybody around the world wants to drive like Americans. The total number of cars — EV and ICE — is projected to DOUBLE by 2040.
Most of this growth is set to happen in emerging markets like China and India. That’s because global populations are set to rise by another 2 billion over the next 25 years, to 9.2 billion people. And the population growth is in those countries.
You know what else all those people will need? Not only energy. Air conditioners, dishwashers and TVs. Aluminum … stainless steel … copper … metals of all types.
Precious Metals
My subscribers are already riding this big, bullish trend. There is a lot more to come. A long and brutal bear market dried up exploration. That is squeezing supply. At the same time, those global population forces I mentioned are boosting demand. Now throw in geopolitical and global financial risk. This means we are looking at a price explosion in gold, silver and more.
Cannabis
Cannabis is not in the CRB Index. But it should be. I have made my subscribers a heck of a lot of money deep in the weeds.
And boy, this party is just getting started …
There is a tidal wave of legalization in the U.S., Canada, Mexico and around the world. Fortunes of a lifetime will be made in this industry in the next few years. This is my biggest, most-rampaging bull of the new bull market.
So, if all these bulls are running, you can do it on your own, right? Maybe … and maybe not.
Let’s go back to the bulls of Pamplona. One man who ran with the bulls said:
“It is madness and chaos when you’re in the run itself. You’re running with thousands of people but you’re actually only worried about what’s happening 10 feet in front of you and right around you.”
The same goes for this commodity bull market, too. If you’re too close, you can get gored. It helps to have some perspective.
That’s what I’m offering you here. I want you to run with the bulls. I DON’T want you to get trampled by the wild swings of the crowds. The madness and chaos that can shred all your hard work and money in a matter of minutes.
If you don’t listen to me, please, just listen to someone else. Get someone to keep you on the straight and narrow. Don’t get gored.
But whatever you do, don’t miss this running of the bulls. Your fortune is calling. The bulls are snorting. The race is on.
All the best,
Sean Brodrick
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