Many of the past market posts have focused on more of the technical price aspect of markets along with behavioral finance factors (sentiment / greed & fear / etc).  As my feeling is those factors can play a more dominant role in intermediate (< 6 months) fluctuations in the market than fundamental components.  I do acknowledge in the longer term fundamentals will rule, that is why if your time frame is 10 years + you can take the long view and not let monthly or annual swings affect your strategy.  However as human beings instead of machines, I really don’t think that is reality for most of us.  It’s fine to be unemotional if your managing money for institutions with a multi decade timeframe, but with individuals there is no way around the emotional component of seeing their money move on a daily/weekly basis.  Yes, as I told a Bloomberg reporter recently that an academic paper saying a 100% allocation to stocks in theory was better than a 60% stock / 40% bond portfolio, the reality is it wasn’t right for everyone (link:  Try explaining to a retiree watching their assets dwindle in a vicious bear market (2000 tech bubble collapse) that they are in it for the long haul and the academics  state that 100% stocks are better.

Another component that many folks forget is that we’ve had a record breaking 10 year run in the markets, and that doesn’t generally continue indefinitely without some sort of hiccup.  Yes, overtime stocks historically go up.  No question there, it’s just what is your timeframe?  Consider the lost decade from 2000-2010 in the markets where it took 10 years for the S&P to hurdle the 2000 high.  Those things happen and you have to always keep market cycles in consideration when approaching long term investment strategy.  It’s just my feeling that investors need to be on their toes and ready to adapt to whatever is thrown at them for the next decade.  Could 2024 be higher?  Sure, but the probability of being an easy straight line up is very low.  And looking into the future, knowing the reality of economic cycles, do you really think the next 10 years will be nearly as easy as the last 10?

I’m definitely not a doom and gloomer,  in fact I see a lot of opportunity ahead.  I just don’t think it’s going to be easy.

With all that, what do the fundamentals say?  What are the fundamental components that move stocks higher:  P/E expansion, Earnings growth, Dividends?  I’ll leave you with this interesting paper from quant firm AQR that looks at these components in a historical context to where we are today.  Some interesting reading for financial nerds:

Again, just throwing out things I think about as someone managing money for clients.  And lastly a good quote that summarizes my market feelings from William Arthur Ward, “the pessimist complains about the wind, the optimist expects it to change, and the realist adjusts the sails”.  Here’s to keeping it real!

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James A. Daniel

James A. Daniel - Financial Planner


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