Random Muses of the Six Years of Feast

Yesterday, the current bull market in stocks celebrated its six birthday. Back on March 9, 2009, the S&P 500, facing abysmal economic growth, slumped to the level of 676.53. On its sixth birthday, it managed to push ahead over 8 points to reach 2079.43 for a gain of well over 200%.

Coincidentally, the NASDAQ also reached a milestone of its own. It was on March 2, the level of 5000 was once again breached. The subsequent drop in the index proved it ephemeral; nevertheless, it was the first such sighting since March of 2000, a full 15 years into the past.

Markets were overvalued in 2000. Yet time heals. Even the astronomically overvalued NASDAQ managed to eventually get your money back over a span of 15 years. One could of course do quite a bit better by investing in the somewhat less overvalued S&P 500. Over the same span of time, one almost earned a double with re-invested dividends. Even better returns are available if we had the foresight of investing in the not-so-overvalued Russell 1000 value index. There we would have scored a near triple.

Over the long term, time heals, but value trumps.

With six years of feast, stock market valuation has again become a concern for many investors. For 2015, consensus estimate for S&P 500 earnings stands around $123. So on the sixth birthday of the bull market, the S&P 500 carried a forward multiple of 17 times. Even though the current market multiple is still well below that reached in 2000. One must acknowledge that stocks are indeed overvalued. More troublesome further, earnings estimate for 2015 had collapsed over the past few months due to the strength of the dollar, low price of oil and slow economic growth internationally. Furthermore, the Fed is on course to raise interest rates over the second half of the year. Historically, bull markets often perish by the hands of the overzealous Fed.

Faced with such negativity, retreat is of course one’s natural inclination. But retreat for how long? Yet again, let’s seek the oracle of history. It was 1946 that we last had a 10 year Treasury yield around 2%. Over the next 30 plus years, yield on the 10 year Treasury would exceed 15%. Over that span of time, S&P 500 earned an annual return of over 10%, while Treasury bond averaged 2% within a 5% average inflation environment. Even though the 5% real return delivered by stocks was well below equity’s historical average, it soundly bested those of cash and bonds which lost purchasing power over the same period. An overvalued market necessarily implies a below average return in the future, but it does not make it any easier to create better return by jumping in and out of the market.

So much energy in the market is spent on the unpredictable, yet the surest way to create better return is to find good companies selling at good value. Isn’t that how the greatest investors do it?

So when it comes to investing, time horizon matters and above all, value matters.