Vladyslav Koptiev
Vladyslav Koptiev @AtlasCapital
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This analysis was induced by a very interesting thoughts written by @BalanceAM about his approach on current market level and future probable returns after FED decreased interest level 3 times in a row. I believe there are few important reasons why investor must exercise vigilance at this stage. 1. Record level of market capitalization to GDP ratio in US. That being said, from a historical prospective, future returns are limited to -2% (minus two) based on expectation that Market Cap/GDP ratio will revert to it’s historical average and fair value level at 80%. Even though a lot of factors have changed in XXI century for this ratio to be considered as important, it is still important yardstick in my opinion. No one can expect this ratio to grow forever without appropriate increases in GDP and in particular business earnings. I attribute main reasons for growth in this ratio to higher share of business earnings in GDP (also caused by tax reform in US). With this effect to fade over time, return to the mean is inevitable later or earlier and mean is 80%. Basically we can experience double effect when this happens – slow down in earnings growth itself and even sharper slow down in market cap/GDP ratio. 2. Super-rich around the world are already preparing for a recession. More and more rich people expect recession or stock market collapse in 2020. To mitigate risks, 45% of them are already adjusting their portfolios, including shifting to bonds and real estate, while 42% are increasing their cash reserves. www.cnbc.com/2019/09/24/a-majority-of-ultra-wealthy-expect-a-recession-and-are-hunkering-down.html 3. Yield curve inversion. A widely watched indicator of recession sent its most dire signal since the early days of the financial crisis on August, 28, reflecting increasing gloom in the US markets. This kind of inversion of the yield curve — in which shorter-term rates are higher than longer-term ones — has preceded every US recession of the past half century (Chart 2 in comments). Shaded areas indicate U.S. recessions. 4. Direction of future interest rates. Even though there is still a room for further decreases of Fed Funds rate, the long-term trend is upward in my opinion. Must be mentioned that low interest rate can last during very extended period of time, and no one can predict direction and when switch will happen. But, current level suggest that long-term direction will be upward and this will inevitably drop down market valuations. 5. Fear and Greed index. We all know that knowledgeable investor should be fearful when others are greed, and greed when others are fearful. Chart number 3 in comments will say for itself. 6. Investors are habitually guided by the rear-view mirror, and, for the most part, by their recent experience. What do we have as a result? Constantly growing valuations which feed themselves to grow even higher. History shows that this can't last forever. Bear in mind that this is not a prediction of future market movement. My prediction of the future market movement can be only long-term (i.e. for next 10 years) and here I expect $SPX500 to deliver maximum 2-3% annually. Based on this, I have a feeling that keeping around 30-40% of portfolio in cash is vital for the better future returns. Huge market growth is unlikely to happen, means your opportunity cost will be low, but plunge is quite possible within next few years. This cash can be used at a later stage to buy shares at lower level. $China50 $NSDQ100 $FRA40 $UK100 $BRK.B (Berkshire Hathaway Inc) Sincerely, Vlad. ... Show More