What reigns in the United States is what can be characterized by the phrase from the title of the famous book by Elroy Dimson, Paul Marsh and Mike Staunton “The Triumph of the Optimists.” The unrestrained growth of shares ONLY on the growth of liquidity (growth in the money supply).
In these two pictures, corporate profits after taxes, which grew by 4% over 8 years, M2 money supply with an increase of 82%. At the same time, the S&P added 118% over the same period !!!
If we translate all these numbers into percent per annum, then:
✅ growth rate of corporate profits 0.51% per year
✅ M2 – 7.5% per year (and only in the last 10 months, M2 grew by 23%, just think before that it took 4 years for the same growth !!!)
✅ S & P500 – 9.8% per year
The 1.8 percentage point difference between the M2, S & P500 growth rates and corporate earnings can be easily explained by volatility. Therefore, the contribution to the growth of shares of the monetary aggregate M2 can be safely considered equal to 95%, or even 99%.
The picture looks even sadder on the S & P500 chart, correlated with US GDP (see chart above). On it, 95% of the upper confidence intervals have been broken both in the period since the end of VM2 and after the abolition of the gold standard, which can be considered a fundamental change in the monetary system and a new era in the economy of the United States and the world. It is clear that, like any “relationship graph”, it can change significantly (normalize) due to a change in one of the factors. For example, due to the rapid growth of GDP, or due to falling stock prices.
I can hardly see the reasons for the rapid growth of GDP. The economic stagnation of the last 8 years is a good confirmation of this (we have already found out that the entire growth of markets is provided by the growth of M2). This means that the fall in stock prices remains. But they will try to prevent the latter, or at least they will pull to the last. In any case, it looks like the next 10 years may not be as successful for the US market as the previous ones.
We all know well that since the mid-1980s, Fed rates have been falling steadily, and each subsequent rise has been lower than the previous one. In the language of technical analysis, we would say that there is a downtrend. But this indicator can be viewed inversely. In other words, if we divide 1 by the rate, we get an indicator that shows the time it takes to double the investment amount if we count using the simple interest method.
✅ If you look at the period from 1963 to 2000, then such an inverted indicator gave more or less reasonable values, although it was very volatile (right scale).
✅ If you look at this graph for the entire period, then the figures starting from 2008 are simply absurd. And even the low points in 2019 were higher on it than those observed in the United States for the period 1963-2000 (41 is the minimum of 2019, 34 is the maximum of 1992 and 1964)
But it’s much more interesting to look at this indicator, in comparison with another – P / E (let’s take it for the S & P500 index). They are very close in meaning. P / E – shows us how many years the company must receive current profit to justify the purchase of its shares – that is, to return the price paid for this share.
It is clearly seen that for the period from 1963-2000 these indicators are very close. And the growth in the terms of return on investments at the FRS rate (or in other words – its decrease), is accompanied by an increase in P / E on shares. BUT! P / E looks less volatile, and this is well explained by the fact that the stock market is actually considered more risky, so investors are not ready to significantly increase the risk (increase the return on investment) in stocks. And in general, the whole story looks quite adequate right up to 2007. And even a strong decrease in rates to eliminate the consequences of the dot-com crisis could not knock investors out of the rut of reasonable fears (though the dot-coms themselves drove P / E by 45).
If we exclude the 2008 P / E peak from consideration, which was clearly false (due to P / E indicator traps), then the last 4 years the ratio has been at all-time highs, which was significantly exceeded only once – during the dot-com crisis. Well, in 2020, the rocket sent this coefficient up again.
Here, some may say that in general this is normal, because rates are low, which means that the P / E may rise. And I would think this way, but low rates are not equal rates – 0. I believe that such rates should alert us, since the reliability of the “issuer” of these rates is questionable, and if so, then the revision of risk rates (discounting ) is required to be carried out with a possible change in this very reliability. This will be akin to expecting a downgrade on the bonds’ credit rating. And now it is difficult to imagine what will happen if such a revision of risks / ratings happens in relation to the United States.
All of the factors I’ve looked at create a clear idea that investing in US stocks is like a passing flag. The player loses who, by the whistle, does not have time to pass this flag further. The trouble is, no one knows, or even close, when the whistle will blow. Many professional managers cannot stay away from the game for a variety of reasons and mainly because they are paid to do so to find in the game. Private investors can choose.
Does this mean that I am not going to do anything in the American market? No! But I understand for sure that the next long-term investments in it will be sectorial, and even point-like. This is a challenging task that will require a lot of time and research from me.