InvestorsFriend Newsletter December 5, 2022

InvestorsFriend Newsletter December 5, 2022

Is NOW a good time to invest?

Those thinking about putting money into stocks and bonds are always wondering whether now is a good time to invest. And those with money invested are often wondering if they should pull some or all of their money out of the markets.

And this is particularly the case today when the direction of the stock market seems so uncertain due to talk of recession, the impact of inflation and higher interest rates and even the possibility of the war in Ukraine turning into a much larger conflict, possibly even a nuclear conflict. Scary stuff!

But the reality is that there is seldom a time when investors and potential investors don’t face major uncertainties and fears. The future is never clear. It’s only in hindsight that past markets seem far less risky.  Various market crashes and plunges that seemed to last forever when we lived through them eventually start to look like short-term blips after enough time passes.

So, it’s never really clear which way the market will head in the short-term. A more realistic goal is to at least analyse whether or not the market seems over-valued or undervalued in relation to its earnings and the longer term growth trend for earnings/ 

A few days ago, I competed a detailed analysis of the valuation of the S&P 500 when it was at level of 4026 and trading at trailing price to earnings (P/E) level of 21.5 and a forward P/E ratio of 20.1. I concluded that the market at that level was probably about fairly valued. Based on that, I would say that now is a reasonable time to invest in stocks and there was no indication that it is a time to aggressively pull money out of the market. The key, as always is to be balanced and keep some funds in cash and fixed income in order to not become overly exposed to the market. And that’s especially true for those with larger portfolios.

Last year on November 12, 2021 with the S&P 500 then sitting at 4,641 and trading at a lofty P/E ratio of 26.4 times trailing year earnings, I concluded that the S&P 500 was over-valued and that its fair value as a point estimate was 3788 at that time. During 2022 the S&P 500 dropped as low as 3,492 (that was on October 13, only seven weeks ago). It’s now recovered to 3990. But it appears that I was correct that the market was over-valued last November.

What to Invest in Now?

The theoretical best investment portfolio is always “a little bit of everything”. A portfolio that is well “balanced” across the various asset classes (primarily fixed income and equity stocks) and well diversified among industries and regions of the world, in theory, has the best expected return versus risk profile in the face of uncertainty.

Such a balanced and diversified portfolio will always give an average result. The very definition of average should be based on such a portfolio. About half of investors using any other approach will outperform the average and about half will underperform. Nevertheless, the fully balanced and diversified portfolio is theoretically the best unless you have good reason to think you can outperform the average.

And indeed many of us do think that we can do better than average through analysis and by following certain advisers and approaches.

But most investors should consider putting some, most, or all of their investments into a balanced and diversified portfolio. And the good news is that these days you can do that by simply purchasing just one low-fee Exchange Traded Fund on the Toronto Stock Exchange such as Vanguard Canada’s VBAL or iShares XBAL. Some have described investing only in such funds as “VBAL and chill”.  

You can rest easy with such an investment because you will get an average return. The investment could certainly decline (probably temporarily). But any losses will be in spite of the fact that you made a theoretically good and prudent investment. You can honestly tell your spouse that any decline is not your fault. And any losses are almost certain to be temporary in any case. 

For more detail on this approach see my article here. The article also covers versions of  these EFTs that are somewhat more conservative or more aggressive.

For those interested in investing in individual stocks with at least some portion of their funds, InvestorsFriend does offer advice on that as well. Click the “Stock Picks” link at the top of this page for more information. 

Loss of Trust in Our Economic System

I think it’s fair to say that the most Canadians today have lost trust in our economic system. Most people do not trust competition to keep prices at a fair level (witness the current accusations that he grocery industry is using inflation as an excuse to price gouge). And most people do not seem to think that the economy is providing fair wages and a fair opportunity especially for younger people.

Sadly, I think these people have good reasons to think that way.

Consider how our the retail landscape has become more and more dominated by fewer and fewer national-chain competitors. Back in the 1960’s and 1970’s Canadian towns had main streets lined with independent locally owned grocery stores, clothing stores, insurance brokers, hardware stores, shoe stores and other businesses.  The owners were local people who in most cases were not extremely wealthy. There were some national chains like Canadian Tire and the car dealers and gas stations (which were also car repair shops) and of course the big banks. But I don’t think either these dealers or the bank managers were head and shoulders wealthier than most of the local people. Money was tight all around and with multiple competitors people tended to trust that competition worked to keep any particular store from gouging them. Everyday pricing was the norm. Telephone and electricity rates were regulated. Fast-food chains and casual dining chains were rare and just coming into existence.

Today, the great majority of our spending is with national or even international chains and corporations. Truly independent businesses are a far smaller part of the economic landscape. That has both pluses and minuses. These huge chains and corporations operate with economies of scale and lower costs. In a well functioning competitive economy (try not to laugh) most of their lower costs would get passed along to consumers with lower prices. 

But it’s a fact that there are far fewer of these national chains to choose from compared to the old days of numerous independent businesses. Consumers are well-founded in their suspicion that there is insufficient competition.

For example, today in Canada we have just 3 major national grocery chains (Loblaws, Sobeys / Empire, and Metro – although each of these operates under several brand names). Costco and Walmart are also major national grocery sellers. So, that’s just five choices in total and Costco and Walmart are not always conveniently nearby.

There is a recent huge  example that I believe proves that the largest corporations are not competing aggressively on price. In late 2017, Donald Trump reduced U.S. corporate income taxes massively from 35% to 21%. The financial press and analysts, seemingly without exception, predicted that stock prices would rise with substantially higher profits due to the lower income tax.  But I thought that competition would force companies to pass along most of the savings in lower prices. They would not want to, but I thought that, for example, if one grocery store did pass on the savings and one major fast food chain did then the others would be forced to follow. I was completely wrong.

Stock prices and profits soared and (except briefly during the pandemic) have never looked back In fact, profits on the S&P 500 in 2022 are just about precisely double what they were in 2016. And lower income taxes that were never passed along in lower prices are a good part of the reason (along with normal growth in the economy). This is strong evidence that these huge companies in the S&P 500 do not face much competition on the basis of price. And take a look at who these companies are. Among the top 6 companies in the S&P 500 are: Apple, MicroSoft, Amazon, Alphabet (Google), and Tesla. It’s not hard to imagine that by their nature these companies are not competing much on price. There are other reasons for their dominance. Some large companies including Costco and Walmart do compete heavily on price. But they are the exception rather than the rule.

The bottom line is that there is good evidence that corporate concentration and other factors have led to a situation where competition is not as effective in protecting consumers.

So, people are right to have a lower trust in the economy and that is a very bad thing. Well, I guess for us investors it’s a good thing. This may be a good case of “If you can’t beat ’em, join ’em”. (Become an investor.)  Critics take the opposite approach of “if you can’t join ’em, beat ’em” (up). Perhaps the best logical and moral choice is to do a bit of both.


InvestorsFriend Inc.
Shawn Allen
December 5, 2022



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