S&P 500 Valuation
Click the link for a detailed analysis of the valuation of the S&P 500. The analysis suggests that it may be moderately over-valued at this time considering its level compared to earnings and considering the higher level of interest rates.
Invest where you spend your money?
What if we invested where we spend our money? What would we own and how would we have done? I’m more familiar with the Canadian situation than the U.S. but the following are my observations on such an investment strategy – and it includes a number of U.S. companies that are popular in Canada.
Most people spend money on interest and/or fees at their bank each and every month – and banks have been good investments.
Almost everyone uses either Visa or MasterCard frequently. And even if we are not paying interest we are indirectly generating income for Visa Inc or MasterCard from the fees that businesses pay to accept those cards. And Visa and MasterCard have been fantastic investments over the years.
Amazon – This has been a fantastic investment.
Netflix – Another great investment although with huge volatility at times.
Costco – As a customer you can easily see how busy they are and the enormous volumes they sell. Not surprisingly it is very profitable and has been a fantastic investment.
Your electricity and your natural gas provider – Most of these companies are monopolies and make steady profits and have been good investments for decades.
Your cell phone provider – A great recurring revenue business and most of the large companies have done very well over time.
McDonalds – They used to brag about billions of burgers served. There have also been billions of dollars made. Too bad most of their customers never owned any shares.
Grocery chains – Everyone has to constantly buy groceries and not surprisingly these have mostly been quite good investments.
Dollarama – Canadians flock to their stores and most of the customers would be absolutely shocked at how profitable they are and how much their shares have risen over the years.
Starbucks – No one would be shocked to learn that this is a very profitable company and that its shares have done very well over the years.
lululemon – Its customers love their products but they know that their prices are high. Accordingly, share owners have been very handsomely rewarded.
MicroSoft – Billions of people use their software daily and it should come as no shock that shareholders have done very well indeed.
Apple – iPhones are everywhere and we are all increasingly addicted to our phones. And of course, Apple Inc. has been a fantastic investment.
So, if you are thinking about what companies to invest in, give a thought to where you are spending your own money. In many cases it may be fairly obvious that a company is quite profitable. It’s much more difficult to know if the share price is already fully reflecting that profitability. But in most cases profitable and growing companies where you are spending money month after month are likely to be good investment choices in the long term. And there is also the added psychological benefit of knowing that you now own a piece of the companies that are getting your money on a regular basis.
Many of these companies have had periods of sharp share price declines but in the end simply holding these companies for the long term tends to work out well.
Outlook for 2024
One of the main expectations for 2024 is that inflation will moderate leading to a modest decline in interest rates by the end of the year. That’s positive for stock prices. However that expectation may already be fully “priced in” so that stocks have already risen on that expectation. The S&P 500 appears to be moderately over-valued at this point and so if the interest rate reduction does not occur then that will be negative for stock prices.
The war in Israel and the war in Ukraine have the potential to escalate which could cause investors to become more fearful pushing stock prices down.
The unfolding 2024 election cycle in the U.S. could certainly cause some turmoil in the markets. The population is divided. Court cases going against Donald Trump could certainly cause a lot of unrest. And it’s hard to know how the market would react if it appears likely that Donald Trump could return as President.
The best strategy for investors is likely to remain diversified across equities, fixed income and cash. With cash and cash-equivalents now paying reasonable returns there is certainly nothing wrong with keeping a meaningful proportion of investments in cash. Cash provides stability and allows us to take advantage if stock prices do decline at some point.
END
Shawn Allen
InvestorsFriend Inc.
December 14, 2023