Preparing For Lower Returns
by ilene - January 27th, 2020 12:14 am
Preparing For Lower Returns
Courtesy of Michael Batnick
We’ve been hearing about the prospect of lower future returns for U.S. based investors for years now*. The thesis behind this is fairly straightforward; high recent returns coupled with high valuations in the stock market, and low interest rates in the bond market is not conducive to further above average returns.
Consider the following:
- A U.S. only 60/40 portfolio has compounded at 10.5% over the last 10 years.
- The CAPE ratio is at 30.9
- The ten-year treasury is currently yielding 1.8%
The more you pay for an asset relative to its underlying fundamentals, the less you should expect to receive going forward. You can see this relationship in the chart below, which plots the inverted CAPE ratio on the left-axis, and forward 10-year returns on the right-axis.
But valuations don’t matter over the short-term, sometimes matter over the medium-term, and usually matter over the long term. This is a long way of saying that valuations are a terrible timing tool, as we’ve learned over the last few years. We can see the relationship between higher valuations and lower returns in the chart below. Again, they matter, but no guarantees.
Future bond returns, unlike stocks, can be boiled down to a single variable, starting yield. The chart below shows the relationship between the starting yield of a ten-year bond and the future ten-year returns.
Below is a scatter plot that shows just how tight this relationship is. Starting yield tells you pretty much all you need to know about forward returns.
Okay, so we suspect that the above average returns we’ve been accustomed to won’t continue forever. The obvious question is, what do we do with this information?
Here are a few ideas (not investment advice)
Go beyond the S&P 500. Value stocks have done well, despite lagging by nearly 2% per year, foreign stocks, both developed and emerging, have done bubkis, while commodities have done downright awful.
If you’re worried about not just lower returns, but a potential market crash, realize that…
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AMZN ... thanks Phil; boy did they run a squeeze on everyone there ... made me sweat ... scaling helped! I think AMZN has an 85 handle tomorrow ... maybe lower.
Cap
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Just closed out my V put for 50% in 24 hours thanks Phil!
Humvee
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Phil: Once again thanks for those inciteful comments, and the old links to Sage's portfolio management (I hadn't read before). I'm an experienced stock trader, but over the last 3 or 4 months have come to appreciate options trading here at PSW, and the consistency of your many premium-selling strategies. It is liberating to have to worry less about getting direction right and being able to generate 5% MONTHLY returns with close to delta-neutral positioning. Much appreciated!
Neverworkagain
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I'm just starting my second year as a member, and I'd like to thank all of you for sharing your trading ideas and insight, and especially Phil of course for great all-around investing advice as well as trades! In addition to learning patience and profit-taking, I think one of the most important things I'm learning here is to stick to stocks and trades that suit my temperament. And wow, I had NO idea how hard it was to learn patience. I should say "practice" instead of "learn", because it seems to be a constant struggle. Phil, please keep reminding us how nice CASH is!
Jerseyside
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Speaking of the "Man Who Planted Trees", it really works. I bought BTU back in March at $49.87. I practically bought it at the tippy top. However, I soon afterward found this site, started learning Phil's methodology(and those in the strategy section) and began selling calls/puts regularly against my bad position. As of yesterday, I still own the original 100 shares, but have brought my basis down by over $11.00. Couldn't be happier, what started out as a really bad entry, I have managed to work down to a good basis. Had I not watched that video and learned your system, I would sold out of the position, and been kicking myself for making such a bad entry.
Hoss
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Why were the analysts wrong? If I were a Japanese investor who purchased US stocks prior to November at Y80 yen to the dollar, with the US market up an average of 15% or more and upon selling the asset I covert dollars to Yen, also realizing an additional 25% gain (one dollar now converts to 100+ Yen rather than the 80 I used at time of purchase), I think I would be unloading US assets also. But analysts never do the math in their articles nor very rarely bring up or discuss the ramifications of currency fluctuations. I don't include Phil in this group as this is a valuable lesson I am learning from him.
Denlundy
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Thanks, after years of blood and blunders, I have reached a significant milestone – I don't lose money. Net net, I rarely have a losing week, market up, market down. And that I owe to you. Balanced positions. More premium sold than bought. Fundamental criteria applied to good companies, not momentum/ news headlines/ stock du jour/ triangle squeezies. But rather earnings, P/E, dividends, competitive position — the boring stuff that takes study, thought,….and patience. You have been a great teacher, and I have embarassed myself repeatedly day with how slowly I learn. And it's a funny thing – if you don't lose, the gains start to pile up. The arithmetic is cruel to the downside, and becomes a gift in the other direction. And I'm in this for the long run, having made myself unemployable through a need for diversification. Moreover, what I've learned here has also elided into other areas, including real estate and ex-U.S. investment. Pretty cool. Have a great weekend.
Zeroxzero
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Phil - I just referred 10 people. Last week was a 50% gainer for me. There are companies that want to sell mentoring service for thousands of dollars. This is far better of a deal with very good advice.
Steve
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Phil fantastic call on the markets… I owe you BIG…thanks and have a great weekend!
Kustomz
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BTW Phil, I wanted to relate a conversation I had with my business partner yesterday. I told him that I have been much more relaxed about my investments ever since I joined your site. It's funny how a 15-20% cushion does to your nerves. My returns have increased dramatically and my risk diminished. Many thanks for the guidance and patience. Good thing I am doing better financially as you might have increased my life expectancy as well!
StJeanluc
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Phil – In the event of a mkt meltdown, which of the indices, in your opinion do you think has the most potential for % move down. I'm looking at call options on SDS and the DXD. Any thoughts? Ideas? Thanks .. and thanks for being a great teacher! I've learned so much in only a month!
Louis631
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The best play I made this year was PSW. Will renew my membership tonight. Looking for the same trading profit percentages next year, but will have an advantage from the compounding, and much better skills acquired from you and the many skilled PSW co-pilots. Thanks!
Gel1
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Phil: I am always able to figure out your trades, including the rational when put in the right context of previous comments, etc. Keep doing what you're doing. It is much appreciated, and invaluable. Your hit rate of successful trades has been very high in my 1.5 months as a member, but even more importantly is your teaching of how to repair and DD positions that haven't gone your way yet. As with most members, we all have our ‘pet' trading interests, and learning how to think about trading is much more important than a specific trade, which could see the conditions behind it change an hour later. This is the classic case, of ‘Teach us to Fish', rather than just giving us a fish once in a while. Thank you!
Neverworkagain
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I don't post much, but I guess this morning has brought me out. This site has made me tens of thousands, every year since I have become a member. It took me nearly two years devoting 3 hours per day to get on the ball, and actually understand portion sizing, and which trades fit my personal trading style. Before that I spent at least two years working on Buffet style fundamental investing. (Intellegent Investor, Security Analysis, ect.). This site really will teach you amazing things if you just pay attention. Literally it has changed my day to day life, has allowed my family and I to move back to the U.S. from overseas with confidence even with a paycut at my day job, and literally put me in a different league financially. Seriously my life and my children's is better because of this site.
Knightpilot
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Took profit on QQQ 57 Puts, bot 40 at $0.07, sold 20 for $0.15 and 20 for $0.32. Thank, Phil
Bobhu
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Phil, I don't know how I can thank you enough for your guidance this past week. I'm up significantly in my portfolio and I've never been so relaxed watching the market panic. Thanks once again for being here for us.
thechaser
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I cannot believe the success I have had in the last 6 months because of what I have learned here! It has been truly life changing. It's like the old adage about teaching someone how to fish instead of just giving them a fish. Thank you Phil, I am forever grateful and hope I have helped someone else along the way.
Craigsa620
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All I can say is — I understand that the Universe sent me to PSW for a reason. So, I'm listening!! …and studying. Your commentary is literally outstanding. …and your members are impressive as well.
Seaquill
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Phil/ I hope the next 5 year bear market will be as much fun and as profitable as this 5 year bull market. For those who survived 2008/2009, and who imbibed the wisdom of PSW, what a time it has been. Good to have you by my side. I think you are selling yourself short – you need to triple your prices :)
Winston
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Phil & Ephmen85: I hadn't thought about selling the covered calls. That should be the easiest strategy for me since I'm a beginner. Thanks a bunch!
JWick1981
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Hey Phil -- I want to thank you every chance I get for helping me to grow my previous portfolio to being profitable enough to pay off some debts my family had and left me with $1,000 left to use in the markets. You should know that your premium membership is amazing on many levels, You and your readers offer a ton of economic and statistical analysis that I was able to use in my clerical level job in finance. It's a shame that someone as talented and honest as you is not on television each night providing a true service to the investing public and not the clowns and hucksters that are talking up their books to dump on retail investors. Sorry for the long post. I had to say something to you that I never thought I would have the opportunity to. You helped put my family in an almost debt-free life through the stock and option plays that I made during my time as a customer of your service and that has made us very happy. You are a good man and I wish you and your family many years of joy and happiness. I wish I could do ads for you!
DaveJ
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The virtuous trade / Phil throws out so many ideas, that understandably he rejects all calls for a running total of how all ""quoted"" ideas are performing – it would be unworkable. But without such a list, I think it behooves us to call out the trades that have made a difference. January 13 expiration is going to be a big month for me as a significant number of sold put positions will expire worthless. One example of the power of patience and leaving well alone: VLO – sold Jan 13, 17.5 puts for $3.45 – and this trade was placed in August 2011. VLO is currently a tad over $35! And as time went by, and I got more experienced – with the help of Phil and the contributions from board members, I started selling short term puts and calls around this position. Sometimes having to roll, sometimes doubling down but always knowing what I was getting into, and feeling very calm and focussed that whatever happened I could handle it. And if I couldn't then there was always Phil to lend a helping hand. All in all, my profits since August 2011 would qualify as a tidy addition to any earnings from the day job. Thank you Sir.
Winston
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USO, QQQ- Phil, thanks for these plays. Out of USO for about 65% gain today and just keeping 1/4 QQQ.
Ksone88
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I really would like to meet all of the posters here who seem like an intriguing bunch of intelligent, opinionated (without being obnoxious or condescending most of the time), and well spoken people. Not so easy to find in this age of instant gratification and me first attitudes. Usually this results in groups where misinformation is used to gain an advantage, or whatever it takes to beat the other guys. I love the one for all, all for one vibe here, sharing your best ideas and helping each other work together for a common goal, to be successful investors!
craigsa620
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Fed days are fun! Just for grins I decided to see how much money I could make in two clicks. I bought DIA calls right when the surge started and then sold them the minute they hit my account. Net gain of 20% in 20 seconds. Can't do that very often…
MrMocha
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Cory Booker for President. :) . Thanks for all the good futures guidance Phil! Having one of my best months yet. Account is up 75% YTD!
Traderd
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GLD I took out my callers and rolled down my longs this morning, woo hoo!
Ephmen85
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Phil/CL-that play made a quick $500 per contract! Took all of 10 minutes! I want to thank you for helping me not just learn a bit about trading, but giving me some confidence and most of all a rewarding "hobby" to look forward to each day. I have had a few mistakes and losses along the way, but I have had some great wins too and I am now consistently making money trading futures and have even learned to go to sleep while holding a losing position knowing that tomorrow is always another opportunity to win again. So thanks again for your help and patience along the way.
Craigsa620
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Phil, I'm up 34x what I paid in fees for your service, and that only counts the trades I didn't think of myself. Thanks!
Barfinger
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My watch list looks like a grid where Phil's recommendations went UP and everything else went DOWN! It looked something like an ad for Philstockworld. I am half in cash, followed the recommendations (AAPL TASR YHOO) on a 20K portfolio and still up 1% for the day. Thanks!
Sn0gr00ve
How China Overtook The US As The World’s Major Trading Partner
by Zero Hedge - January 24th, 2020 11:05 pm
Courtesy of Iman Ghosh via VisualCapitalist.com
In 2018, trade accounted for 59% of global GDP, up nearly 1.5 times since 1980.
Over this timeframe, international trade has transformed significantly – not just in terms of volume and composition, but also in terms of the countries that the rest of the world leans on for their most important trade relationships.
Now, a critical shift is occurring in the landscape, and it may surprise you to learn that China has already usurped the U.S. as the world’s most dominant trading partner.
Trading Places: A Global Shift
Today’s animation comes from the Lowy Institute, and it pulls data from the International Monetary Fund (IMF) database on bilateral trade flows, to determine whether the U.S. or China is a bigger trading partner for each country from 1980 to 2018.
The results are stark: before 2000, the U.S. was at the helm of global trade, as over 80% of countries traded with the U.S. more than they did with China. By 2018, that number had dropped sharply to just 30%, as China swiftly took top position in 128 of 190 countries.
The researchers pinpoint China’s 2001 entry into the World Trade Organization as a major turning point in China’s international trade relationships. The dramatic shift that followed is clearly demonstrated in the visualization above—between 2005 and 2010, a number of countries tipped towards Chinese influence, especially in Africa and Asia.
Over time, China’s dominance has grown dramatically. It’s no wonder then, that China and the U.S. have a contentious trade relationship themselves, as both nations battle it out for first place.
A Tale of Two Economies
The United States and China are competitors in many ways, but to be successful they must rely on each other for mutually beneficial trade. However, it’s also the major issue on which they are struggling to reach a common ground.
The U.S. has been vocal about negotiating more balanced trade agreements with China. In fact, a mid-2018 poll shows that 62% of Americans consider their trade relationship with China to be unfair.
Since 2018, both parties have faced a fraught relationship, imposing major tariffs on consumer and industrial goods—and
…
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Elites View The World Through “Market-Colored” Glasses
by Zero Hedge - January 24th, 2020 10:05 pm
Courtesy of Lance Roberts via RealInvestmentAdvice.com
It is easy to suggest the economy is booming when your net worth is in the hundreds of millions, if not billions, of dollars, or when your business, and your net worth, directly benefit from surging asset prices. This was the consensus from the annual gaggle of the ultra-rich, politicians, and media stars in Davos, Switzerland this past week.
As J.P. Morgan Chase CEO Jamie Dimon told CNBC on Wednesday the stock market is in a “Goldilocks place.”
Of course, it is when your bank receives an annual dividend from the Federal Reserve’s balance sheet expansion. This isn’t the first time I have picked on Dimon’s delusional view of the world. E.g.:
“This is the most prosperous economy the world has ever seen and it’s going to be a very prosperous economy for the next 100 years. The consumer, which is 70% of the U.S. economy, is quite strong. Confidence is very high. Their balance sheets are in great shape. And you see that the strength of the American consumer is driving the American economy and the global economy. And while business slowed down, my current view is that, no, it just was a slowdown, not a petering out.”
Jamie Dimon during a “60-Minutes” interview.
If you’re in the top 1-2% of income earners, like Jamie, I am sure it feels that way.
For everyone else, not so much. Here are some stats via the WSJ:
“The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.”
Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A full 33% of that gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data.
The problem that is missed is that the “stock market” is NOT the “economy.”
This
…
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‘Slow-minded and bewildered’: Donald Trump builds barriers to peace and prosperity
by ilene - January 24th, 2020 7:00 pm
'Slow-minded and bewildered': Donald Trump builds barriers to peace and prosperity
Courtesy of John Hawkins, University of Canberra
The US president “had no plan, no scheme, no constructive ideas whatever”, according to one of the world’s most influential economists.
He was “in many respects, perhaps inevitably, ill-informed”. He was “slow-minded and bewildered”, and failed to remedy these defects by seeking advice. He gathered around him businessmen, “inexperienced in public affairs” and “only called in irregularly”.
This assessment was written a century ago, in 1919, by the up-and-coming economist John Maynard Keynes.
The president was Woodrow Wilson, whom Keynes criticised for his inability to influence Europe’s post-first world war settlement in a way more likely to lead to peace and prosperity.
A century later the United States has another president out of his depth in global affairs. Wilson, at least, was a “generously intentioned” man. What would Keynes make of Donald Trump, whose policies are driven by a sense of entitlement and fear of being played for a sucker?
This week, at the World Economic Forum in Davos, Trump flagged new fronts in his dangerous campaign of economic nationalism. He reaffirmed his intention to reshape the World Trade Organization, which he said been “very unfair to the United States for many, many years”.
He fretted about the “tremendous advantages” given to China and India. He threatened tariffs on European cars if the European Union didn’t agree to a “fair” free-trade deal.
The barrier-besotted president is pretty much everything Keynes warned against as ruinous to the prospects of a lasting peace.
A tale of two presidents
Keynes had observed Wilson at the talks in Paris to conclude the Treaty of Versailles, which set out the detail of terms and conditions following Germany’s surrender (on November 11 1918) to end the war.
Wilson had proposed 14 points for a “just and stable peace” but proved completely ineffectual at the talks. The result was a treaty with terms so punitive for Germany they arguably created the conditions for Adolf Hitler to come to power, and thus led to the second world war.
Keynes’s disquiet with the treaty led him to write…
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Faltering Friday – Coming to the End of a Weak Week
by phil - January 24th, 2020 8:35 am
We're in danger of having a down week.
We opened on Monday at 3,321 on the S&P 500 and we closed last night at 3,325 so it won't take much for us to dip under and close the week in the red. As you can see from the chart, if not for that silly gap up into Wednesday's open (which we shorted!), it's doubtful we'd be even close to green now.
Speaking of shorting, our current position is 2 short Nasdaq (/NQ) contracts at an average entry of 9,271.50 and I'd be more likely to add to them if they go higher than stop out ahead of the weekend with China now "locking down" 40M of their citizens (only 2.5%) with travel restrictions on 10 cities as cases have now spread to 32 of China's 34 provinces. The markets got a boost yesterday when the WHO decided NOT to declare a Global Emergency (yet) but that's only because the virus has, so far, been fairly contained to China – for now, I'd rather be safe than sorry with our hedges (see yesterday morning's PSW Report).
As noted by Bloomberg: The turmoil comes as the virus stymies efforts to track infected patients. While the death toll continues to rise — and now includes someone as young as 36 — some infected patients aren’t showing a fever, a symptom governments around the world have been using to screen for the pathogen. Even Disneyland in Shanghai is closing down so it might be time to short Booking (BKNG) again – though we already missed a 5% drop.
I'm not a doom and gloom kind of person but, to put it in perspective, in a usual year, about 30M people around the World get the flu and 60,000 people die (0.2%), mostly people who are old and sick in the first place (not that that makes it better but it's understandable). So far, out of 830 confirmed cases, 26 people are already dead (3%) but, more alarmingly, over 100 people are in critical care units in hospitals – and some of them are young people.
It's the way the Governments are scrambling…
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The PhilStockWorld.com Weekly Webinar – 01-22-2020
by clarisezoleta - January 23rd, 2020 3:04 pm
For LIVE access on Wednesday afternoons, join us at Phil's Stock World – click here.
Major Topics:
00:02:27 – Recap of last week's Trade Deal
00:03:10 – Money Talk Portfolio
00:03:59 – IMAX
00:27:28 – TOT
00:39:40 – Trade Techniques
00:40:45 – Money Talk Portfolio
00:41:37 – Butterfly Portfolio
00:42:37 – GOLD
00:44:46 – Dividend Portfolio
00:56:30 – Futures | More trading techniques
01:01:37 – TSLA
01:10:18 – FCEL
01:18:23 – AAPL | 5G
01:43:03-JP Morgan Profitable Trading Days
01:44:47 – More trading techniques
01:51:28 – Natural Gas
01:52:00 – Earnings Portfolio
01:52:05 – Hemp Boca Portfolio
01:52:10 – STP
01:57:29 – NLY
Phil's Weekly Trading Webinars provide a great opportunity to learn what we do at PSW. Subscribe to our YouTube channel and view past webinars here. For LIVE access to PSW's Weekly Webinars – demonstrating trading strategies in real time – click here to join us at PSW!
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site