Winter is Coming...
Winter is coming…
…but I’m actually looking forward to it.
Pardon my Game of Thrones reference, but Mr. Market, like the weather, can fluctuate wildly day-to-day.
Also the market, like the weather, follows slightly more predictable patterns over longer periods of time.
I can’t predict what the temperature is going to be next week, but I know there’s a high probability that the weather will be warmer in July than it is in May.
The last few years in the stock market have been like a sweltering summer. Total returns over the past 5 years were 26.5%, 15.1%, 2.1%, 16.0%, and 32.4%.
But what are the next 5 years likely to bring?
Well, S&P 500 earnings are at all-time highs, and history shows that S&P 500 earnings declines occur fairly often.
Corporate profits margins are at all-time highs, and likely to revert.
The market seems (to me) fairly expensive at 18x earnings unjusted earnings, but If we “normalize” those S&P earnings to normal or closer-to-normal margins, then the market is more like 22x-25x normalized earnings, which is VERY expensive, especially if those earnings stagnate or decrease over the next 5 years. (Which seems highly likely with profit margins at all-time highs.)
I wouldn’t be shocked to see the S&P 500 go basically nowhere for the next 5 years or so.
Again, I have no idea what the market is actually going to do between now and 2019, but it seems logical to me that the annualized return of the S&P 500 (not including dividends), between 5/21/14 and 2017-2019, will likely be less than 5% annualized.
So why am I excited for poor returns over the next few years?
Here’s why: as a rookie investor, at 25 years old, and have only been studying investing since about 2011, a raging bull market is really the ONLY market that I’ve ever experienced. (Lucky me)
Buffett said “It’s only when the tide goes out that you see who’s been swimming naked.”
Since I started investing 3 years ago the tide has only been coming in, coming in, and coming in.
The past 3 years have been a gravy train. The next 5 are almost certainly NOT going to be.
Inevitably, the tide will eventually have to go out, and when it does, I will see if I have been swimming naked or not.
That is the EXCITING part. What I’ve learned over the past few years of this bull market will soon be put to the test.
Just as the tide must go out eventually, this “5 year summer” we’ve enjoyed in the stock market must eventually give way.
Winter is coming.