Feb 5, 2020

After a year of sizable gains, the global stock market has dropped about 3.5% since news of the virus outbreak in China came to light.(1) We'll discuss the virus scare momentarily, but first we want to share some thoughts on another worry we had recently been hearing a lot about.

All-Time Highs

For several months we've frequently come across headlines and comments about all-time highs in the stock markets. The topic has often been framed as a reason to worry, as if new highs suggest that a decline must be near.

But as we see it, record high market prices are neither particularly newsworthy, nor a cause for concern.

Consider the below chart of global economic growth over nearly 60 years. While there have been slowdowns and pullbacks along the way, the long-term trend has very much been upward. Even the 2008-9 Global Financial Crisis looks like a blip in this long-term history:

  (read more)

Oct 25, 2019

Over the past decade, stock markets have drifted far from their typical behavior in several ways. There is a big opportunity at hand if markets should end up moving back towards normal as they generally have in the past.

This idea is known as “mean reversion” in investing jargon. It sounds complicated, but it’s pretty straightforward: if a measurement has tended to gravitate towards its historical average in the past, then there’s a good chance it will continue to do so in the future. This is especially true if there are sensible “real-world” reasons to expect the mean reverting pattern to occur.

Below we’ll describe a number of measures that have been historically mean reverting for good reason, but that have strayed very far from their typical levels in recent years.  


We’ve discussed this one often, but it’s a very important and dramatic example of deviation from historical norms.

The chart below shows stock valuations, aka expensiveness, for US, international developed, and (with a shorter history) emerging stock markets.(1)

Click for larger version

A couple things jump out....

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Aug 6, 2019

We all know that buying a home in San Diego costs a lot more than in most cities. But that's always been the case, and probably always will be, because San Diego is such a desirable place to live. More interesting is the question of how expensive San Diego is compared to its own history. This can tell us whether prices are out of whack even after adjusting for the desirability factor.

A good way to measure housing expensiveness is to compare home prices to local rents and incomes. Rents tell us how much it costs to live in San Diego as a non-owner, while incomes show how much money San Diegans have to spend on housing.[1] By comparing home prices to rents and incomes, we can get an idea of their cheapness or expensiveness relative to the economic factors that typically drive them. (This is also known as their "valuation").

Here's a chart of San Diego housing valuation since the late 1970s:

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Jan 17, 2019
Our last letter discussed how US stocks had diverged from international stocks by continuing upwards as the rest of the world drifted downward during the middle part of 2018. US stocks went on to decline sharply after that, ending up with a peak-to-trough decline of almost 20% in just 3 months. This closed much of the gap with international stocks, which fell less than US stocks over that period:

Source: stockcharts.com

This sudden convergence shows how quickly things can turn in financial markets. And it's not the only recent instance...

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Oct 15, 2018
As we've emphasized over the years, our global, value-based investment approach demands a multi-year timeframe. We often cite 7-10 years as the appropriate period to think about when planning or assessing returns. Such a strategy requires patience, and there are a couple of main risks that can challenge one's ability to stay the course.

1 - Volatility Risk

This describes how much an account's value changes over shorter periods. If volatility is too high for comfort, one might abandon the long-term approach due to a short-term market decline. We know that there will be inevitable and sizable swings in the markets. (Over the last few days we've been tested on that front too). But by placing our clients into portfolios designed to experience a personally acceptable range of volatility risk, we've done our best to minimize the chance that our clients will experience an intolerable swing. This is something that we've been careful to address and are happy to re-address with you anytime.

2 - Risk of "Tracking Difference"

Another and much less discussed risk that has been noticeable lately is what we're going to call "Tracking Difference" — the potential difference in returns between your portfolio and the US stock market.

The US media mainly focuses on the domestic stock market, so that's what most US investors tend to be most aware of. The returns of the bond markets and international stock markets are often just an afterthought, if that. This is kind of strange, as the GDP of the rest of the world is twice the size of the US, and the international stock and global bond markets together are many times the size of the US stock market. But that's the way it is.

The result is that if a US-based investor's portfolio returns track too differently from the US markets, it can come as a surprise. That can lead to a lack of confidence and even the abandonment of a long-term approach.

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Apr 29, 2018
In our last quarterly update, we focused on the extreme stock market optimism that prevailed at that time in late January. At that point, the market was up almost 7% for the year and, as we discussed, investors were by some measures more bullish on stocks than they had ever been.

Before getting to the punch line, we want to further point out that the optimism had been boosted by the fact that volatility in the market had been at multi-decade lows throughout 2017.

From that moment of historical optimism and extended low volatility, the market has given up all its gains for the year, and we are now seeing headlines like this:
Here are some numbers to show just how huge the jump in volatility has been:

  • The S&P 500 has experienced 14 days so far this year with at least a 1% loss after only 4 such days in all of 2017.
  • There have been 7 days this year with over a 2% decline after no such days in 2017. (Source: Albridge Wealth Reporting)
As we noted in that prior letter, "investors on the whole always get optimistic after markets have done well, and they become pessimistic after markets have done poorly. This gets it backwards." So the experience of the markets since that last letter shouldn't really come as much of a surprise.

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Jan 31, 2018
The world economy has continued to strengthen. Growth in both emerging and advanced countries has been on the rise, with the latter showing a particularly rapid comeback:
This is actually the first time since the global financial crisis that all the world's major economies are growing at the same time:

Source: New York Times (original here )

(read more)
Nov 2, 2017
Renewed optimism about economies and markets has led to an unusual calm. Global stock markets have gone up in practically a straight line since the post-Brexit vote correction ended in mid-2016, and here in the US, markets are by many measures the calmest they've been in decades.

As a result, right now many people are feeling like investing is easy and without risk. This is, of course, not the case: at some point, markets will fall and fear will come to the forefront again. (read more)
Aug 8, 2017
We discussed why we're leery of US stocks in the last article: they just aren't priced for very good long-term returns, especially when compared to much less expensive markets outside the US.

Here's another way of looking at it:
Source: Global Financial Data, AMP Capital

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Jun 19, 2017
The median price of a San Diego home recently surpassed its all-time peak, as noted by the San Diego Union-Tribune (with a cameo appearance from Rich). We thought this made for a good opportunity to share some thoughts on the local housing market, addressing common questions such as…

  • How expensive is San Diego housing?
  • How do low interest rates impact home prices?
  • Are we in another housing bubble?
  • Does it make sense to buy a home right now?
We'll give some quick thoughts on each of these below, along with links to more detailed articles Rich wrote for Voice of San Diego. (read more)