Welcome CNBC viewers!
CNBC anchor Scott Wapner has been kind enough to ask me to come on his show to talk about the articles I wrote last week about how I think there’s a “decent chance” of a stock market crash and crappy stock returns for the next decade and why I’m not selling despite that. I figured you might want some more information about my thinking, so I’ve provided links to the articles below.
I’m also reprinting one of the charts I published in those articles, which shows how high today’s corporate profit margins are and how profit margins tend to (violently) return to their average over time.
I also hope Scott and I can briefly discuss Scott’s interview with Carl Icahn yesterday about Icahn’s demand that Apple spend $US150 billion of cash buying back its own stock. I’m a big fan of Carl Icahn, but as a fellow Apple shareholder, I hope Apple tells Icahn to stuff it. I also hope that Apple CEO Tim Cook doesn’t waste any more time having dinner with Carl Icahn.
(Not because having dinner with Icahn wouldn’t be fun and entertaining — I’m sure it would be. Because Tim Cook has better things to do than have dinner with Carl Icahn and get harangued about financial engineering.)
Back to the stock market call..
First, I should stress that I am not a short-term trader and that I don’t know or particularly care what the market is going to do “next.” If the market charges higher from here over the next 6-12 months, that wouldn’t surprise me and would be completely fine by me. (I own stocks and index funds, and I’m not selling them.) My “call” is a long-term call, and it’s about what I think stocks will do over the next decade, not next week or next month.
I think that, over the next decade, stock prices relative to normalized earnings will return to their long-term average.
Today’s stock prices do not seem expensive relative to this year’s earnings, but that’s because this year’s earnings are based on the highest corporate profit margins in history. In the past, super-high profit margins like today’s do not remain super-high for long. On the contrary, they “regress to the mean,” often violently. And when they do, they often take stocks down with them.
Today’s stock prices relative to normalized earnings, meanwhile — earnings calculated based on average profit margins — are very high (about 25X earnings).
I think that, at some point over the next 10 years, either via a decline or by moving sideways, stock prices will return to a more normal 16X earnings.
Here’s the chart of today’s record-high profit margins. Note how unprecedented this level of profitability is. And note how, in the past, earnings have always regressed quickly to (or below) the mean.
Bottom line, I think the S&P 500 will return about 3% per year over the next decade, a far cry from the 10% that most people expect.
Because my portfolio is already adequately diversified between stocks, bonds, cash, and real-estate. And because none of those other assets are any more attractive to invest in right now. (Bonds have low yields and will get demolished if inflation picks up. Real estate is again expensive. Cash is earning nothing.) On a relative basis, 3% annual returns actually don’t look that bad.
Thanks to CNBC for having me on and thanks for watching. If you would like more details about either the stock outlook or my investment strategy, please read the articles below.
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