Lost Decade Ahead?

Lost Decade Ahead?

By James Parkyn - PWL Capital - Montreal

Stay the course with a diversified portfolio and long-term mindset  

Are we headed for a lost decade in equities? It’s a question on many lips after the stock market’s incredible multiyear bull run.

The worries got amplified in October when Goldman Sachs issued a grim report predicting a meager 3% annualized return for U.S. stocks over the next 10 years (or only 1% after inflation).

The report noted that the S&P 500 Index has boasted a 13% annualized return during the past decade. But high valuations and extreme market concentration—both near 100-year highs—will make it hard for stocks to repeat the same gains through 2034, the report said.

S&P 500 likely to trail bonds: Goldman Sachs

“It is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time,” Goldman Sachs said. “The same issue plagues a highly concentrated index.”

The investment bank said the S&P 500 has a 72% probability of trailing bonds and a 33% chance of lagging inflation during the next decade.

The report prompted nervous news headlines. “Goldman Sachs Is Forecasting a Dead Decade for the S&P 500. Should You Sell Your Stocks?” one investing site pondered. “For a generation of investors accustomed to boom times, the new paradigm being contemplated would be harsh and unfamiliar,” The Globe and Mail said.

Lost decades predicted before 

But as The Globe went on to note, analysts have been warning of a “lost decade” since the start of the current equity bull market.

“We may be looking at a lost decade,” financial historian Niall Ferguson said in 2009. The S&P 500 went on to gain 16.6% a year in the decade that followed.

In 2013, economist John Hussman said “dismal investment returns” were so certain during the ensuing decade that they were “largely baked-in-the-cake.” In fact, annual S&P 500 returns averaged 11.8%.

Booms often end in busts

Giving heed to bearish fears can lead to serious portfolio underperformance. But does that mean we should ignore Goldman Sachs’ predictions altogether?

There’s no doubt equity returns have been above average. Historically, above-average performance is often followed by periods of more modest returns or even losses. A decade of 1% real returns is improbable, but it’s not impossible.

The Roaring Twenties were followed by the dismal 1930s. The great 1942-1965 market run ended with 15 years of doldrums in which the S&P 500 saw -1% real annualized returns from 1966 to 1981. After the remarkable 1982-1999 bull we had the misery of 2000-2008.

Market turns can’t be predicted   

Does this mean it’s time to pull out of stocks and hide under a rock? No one knows what the market will do. Even experts like Ferguson and Hussman get it wrong. Stocks could continue to soar. Or they could sell off or move sideways. Trying to time markets isn’t investing; it’s called gambling.

If we can’t predict the market’s turns, what can we do? At PWL, we’ve studied the data and determined that the best response is to diversify, maintain a disciplined long-term investor mindset and leave the forecasts to the horoscope pages.

Stick to the plan

Diversification also plays another role. It accounts for the fact that most wealth creation in equities comes from a tiny number of companies. Just 4% of stocks accounted for all U.S. stock market wealth creation from 1926 to 2023 above a risk-free investment in Treasuries, according to a recent study.

We can’t know which companies will be the future 4-percenters. But we can be sure to own them by buying broad index funds that hold all the companies in various markets.

No bull market lasts forever. But a long-term mindset and an investment strategy suited to your objectives and risk tolerance can give you the confidence to ignore daily market noise and not worry about whose prediction is right.

Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.   

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

4% of Stocks Created Wealth

4% of Stocks Created Wealth 

By James Parkyn - PWL Capital - Montreal

How to ensure you own tomorrow’s winners  

It’s well known that owning stocks can generate great returns over the long run. Less known is the fact that almost all of that wealth creation typically comes from a tiny number of stocks. 

New research shows that $1 invested in the U.S. stock market in 1926 would have grown to an impressive $229.40 by 2023. That’s a cumulative compound return of 22,840%.  

Even more remarkable, however, is that just 4% of stocks accounted for all stock market wealth creation above a risk-free investment in Treasury bills. In fact, a majority of stocks—51.6% to be exact—actually had negative compound returns from 1926 to 2023. In other words, slightly more than half of stocks lost money over their life. 

The median stock lost 7.41%  

These are some of the fascinating conclusions of Arizona State University economist Hendrik Bessembinder.  

In a new paper, Bessembinder analyzed the retrns of 29,078 publicly listed common stocks from 1926 to 2023. His findings give powerful support for investing strategies that focus on passively owning a broadly diversified portfolio of stocks with a long-term horizon—the approach we use at PWL. 

Here are some of Bessembinder’s other conclusions: 

• Companies remained publicly listed for only 11.6 years on average.  

• Just 31 stocks remained publicly listed in the database for the full 98 years.  

• The median cumulative compound return of all the stocks was -7.41% per year.  

Top performer gained 266 million percent 

How is it possible for the median return to be negative when the mean compound return was 22,840%? This is because of the magic of averaging. The mean average return is skewed heavily upward by massive gains of a small number of companies. These are the companies it’s essential to own for our investments to make money. 

As Bessembinder put it in a recent interview, “Long-run wealth enhancement in the public stock market is concentrated in relatively few stocks.” 

Among the best 30 performers: Emerson Electric Co., in 30th place, with a cumulative return of 2.4 million percent, and top dog Altria Group (formerly Philip Morris), with an otherworldly 266 million percent gain.  

Those aren’t typos. Stated differently, $1 invested in Emerson Electric would have become $24,098, while a dollar invested in Altria/Philip Morris stock would have grown to $2.66 million. 

Compounding led to massive profits 

These astonishing profits, incidentally, show the value of patiently accumulating compounded returns over the long run.  

Interestingly, Emerson Electric made its gains with what Bessembinder calls only a “moderately high” annualized compound return of 13.57%. The key was 79 years of compounding at this rate.  

Altria, for its part, had only a somewhat higher annualized compound return of 16.29%. But when compounded over 98 years, this yielded an extraordinary gain.  

Five firms accounted for 11.9% of gains   

Bessembinder’s findings confirm his earlier landmark research in which he found that just five of 26,168 publicly listed firms accounted for 11.9% of net U.S. shareholder wealth creation of $47.38 trillion from 1926 to 2019. 

This concentration is increasing. In 2016-2019, just five firms accounted for an even bigger slice—22.1%—of shareholder wealth creation. 

“This tendency for wealth creation to be concentrated in a few stocks has grown even stronger in recent years,” Bessembinder recently said. 

How to own the next winners  

What does all this mean? A tiny number of stocks is responsible for almost all wealth gain in the stock market. If you didn’t own those stocks, you would have lost money. How do you know which stocks to buy? You don’t. No one can know in advance which companies will be the best performers.  

The answer is not to gamble your savings and legacy on trying to find the hot new trend of the day, but to be sure you own the next Altria, Emerson or Google by owning every stock. This can be accomplished through broad index funds that hold all the companies in various market indexes, such as the S&P 500 Index or S&P/TSX Composite Index. 

As Bessembinder put it, “The only way to be certain of owning the stocks that turn out to be the future big gainers is to own all the stocks” in a broad index fund.  

At PWL, we couldn’t agree more. This is the approach that is at the core of our data-driven strategy focused on the long term. 

Fads and companies come and go, but a disciplined approach of owning the entire market ensures you’ll benefit from the winning companies of the next 98 years. 

Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.   

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

Revisiting an Essential Guide: Why Young People Must Cultivate Both Financial and Human Capital

Revisiting an Essential Guide: Why Young People Must Cultivate Both Financial and Human Capital"

By James Parkyn

Due to overwhelming demand, we're bringing back one of our most popular posts, "Young People Need to Grow Both Their Financial and Human Capital." As parents increasingly seek guidance on introducing their children to the world of investing, the message in this post remains as vital as ever. The earlier one starts building wealth, the better, and many parents who wish they'd begun sooner are now eager to equip their kids with essential investing skills. To aid in this endeavor, we've created the eBook, Investing Life Skills for Early Savers, which has resonated deeply with readers. This compact guide distills seven crucial investing concepts into just 28 pages, making it an indispensable resource for young savers. As we revisit this insightful post, we hope it serves as a timely reminder that, much like the classic Nike slogan suggests, in investing, the most important step is simply to start.

For more insights and information on investing and personal financing topics, listen to our Capital Topics podcast on our website or wherever you get your podcasts.

Navigating the Market Turmoil

Navigating the Market Turmoil 

By James Parkyn - PWL Capital - Montreal

Stick to your plan and adjust allocations as needed 

Market dips aren’t usually much fun for investors. But they’re often a good opportunity to take stock.  

It’s important to remind ourselves that occasional pullbacks aren’t just inevitable; they can be healthy, even in a strong bull market. Market turmoil can also be a good time to check if we need to rebalance our portfolio and review allocation targets and risk tolerance. 

In the first of our two-part mid-year market review, we looked at how stock markets soared in the first half of 2024. Canada’s S&P/TSX Composite Index was up by 6.05% in the first six months of the year. Internationally, almost all the main indexes we follow made new all-time highs. 

U.S. equities did especially well. The S&P 500 hit a remarkable 31 new all-time highs by mid-year, with tech stocks helping to drive the index to its 13th best yearly start since 1950. 

Pullback was inevitable  

Given the long stretch of almost uninterrupted gains, a pullback at some point was inevitable. Indeed, the TSX kicked off August with a sharp tumble, losing about 5% from its high to the low three days later. 

South of the border, the S&P 500 lost approximately 8% in those same three days before mounting a recovery. The tech-heavy NASDAQ-100 Index has done worse in a decline that started in mid-July, dropping about 15% by August 5. 

Japan has fared especially badly, with its Nikkei 225 Index plummeting about 25% from its mid-July peak to the August 5 low.  

Turmoil explanations vary 

Why did markets go berserk? Some pundits blamed disappointing U.S. job numbers, while others pointed to a sudden rise in the Japanese yen and a bursting tech bubble. “The simplest explanation,” wrote columnist Jason Zweig in The Wall Street Journal, is that “markets went haywire early this week because markets consist of people, and crazy behavior is contagious.” 

The fact is occasional pullbacks aren’t just inescapable in healthy bull markets; they’re common and may even be beneficial. They can work like a release valve when stocks get too steamy, and they provide a good basis for a new rally. 

“Uncertainty is underrated” 

Corrections are also part of the risk that investors take on in order to make a return, as Dimensional Fund Advisors chair David Booth explained in an insightful recent commentary in Fortune. 

“Uncertainty is underrated. Without it, there would be no surprises, no joy in watching sports, and no 10% average annualized return on the stock market over the past century. All investments involve risk—there is no guarantee of success. Investors can be rewarded for taking on the risk of not knowing exactly how things will play out.” 

Booth said the job of investors is to manage their risk: “That means ensuring our portfolios are diversified across regions and asset classes.” 

Good time to rebalance  

At PWL, we couldn’t agree more. Our approach is to manage risk with an evidence-based approach of passive long-term investing in a diversified portfolio. As asset values fluctuate, we also regularly rebalance to maintain allocation targets. 

For readers who aren’t clients, we suggest regularly reviewing your portfolio to see if it’s still in line with your targets. This is especially important after a prolonged rally such as the one we’ve seen since September 2022. 

A rally can cause the stock portion of your portfolio to be significantly greater than it should be based on your investment plan and risk tolerance. In that case, you may need to rebalance your portfolio to bring it back in line with your targets. 

Reflect on targets and risk tolerance 

The recent turbulence is also a good opportunity to reflect on your allocation targets and risk tolerance. Be sure they’re still aligned with your needs and expectations.  

If you feel you can stay the course during a correction, there may be no reason to make changes.  

A skilled financial advisor can help you craft an investment plan to ensure sufficient funds to live on and protect your legacy. 

Follow your investment plan with discipline 

The most important lesson of all is to follow your investment plan with discipline and shut out the market noise. That’s especially important when noise levels rise.  

As money manager Shelby M. C. Davis, founder of Davis Selected Advisers, has said, “History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” 

Indeed, since the early August pullback in stocks, the main Canadian and U.S. indexes have recovered a good part of their losses. No one can know if the turmoil will continue, but we can get some peace of mind knowing that pullbacks eventually end. And in the meanwhile, following an investment plan with discipline can help you stay the course. 

Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.  

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

2024’s Bullish First Half

2024’s Bullish First Half 

By James Parkyn - PWL Capital - Montreal

An impressive start for equities capped by recent turbulence: part one of our two-part mid-year review 

In this post, we’ll review the performance of the markets so far in 2024. It’s a subject we cover twice a year to help you better evaluate your portfolio’s performance. 

Our review will come in two parts. First, we present our mid-year market check-in. In our next blog post, we’ll take a look at the market turbulence of the first few days of August and our thoughts on steps to help protect your portfolio. 

Recent volatility aside, the year 2024 got off to a great start. Equities built on a powerful rally in 2023 that saw the S&P 500 Index return an impressive 15.8% in the last two months of that year. 

Rally came despite uncertainties 

As we mentioned in our recent podcast, the strong results for 2024 came despite a load of uncertainties. Stubborn inflation meant prolonged high interest rates that impacted the economy. Market pundits speculated about the possibility of a soft landing or even recession. 

This has been coupled with instability over Russia’s war with Ukraine, conflict in the Middle East, U.S.-China superpower rivalry and heated election campaigns in major powers, including the U.S.  

But despite the headwinds, equity markets have shrugged off the doubts. As the Wall Street saying goes, the bull market has been climbing a wall of worry. As well, gross domestic product growth has remained positive in Canada, the U.S. and the Euro Area, and inflation has started to decline, allowing some central banks (like Canada’s) to start cutting rates. 

Short-term bonds outdid longer-term 

How did markets do in the first half of 2024? Starting with fixed income, yields in Canada and in the U.S. remain well above the average of the last 20 years. 

In Canada the yield on the 10-year Government of Canada bond was 3.5% on June 30, which is 100 basis points above the 20-year average of 2.5%. In the U.S., the yield on the 10-year Treasury note was approximately 4.4% on June 30, or 140 basis points above the 20-year average of 3.0%.  

Year to date, Canadian short-term bonds were up 1.6% as of June 30, while the total bond market, which holds longer-dated maturities, was down by 0.4%. (Remember that bond yields and bond prices move in opposite directions.)  

Almost all equity indexes hit new highs 

Equity markets have done much better. All the main indexes we follow had strong positive returns in the first half of the year, making new all-time highs. U.S. equities have done especially well, with the S&P 500 hitting a remarkable 31 new highs by mid-year. 

An exception has been the MSCI Emerging Markets Index, which was impacted by the poor performance of Chinese equities which despite their recent surge remain down close to 42% from their all-time high. 

In Canada, the S&P/TSX Composite Index was up by 6.1% in the first half. Large and mid-cap growth stocks led the way with a 7.4% gain compared with 4.7% for large and mid-cap value stocks. Small cap stocks outperformed large and mid-cap stocks with a performance of 9.3%.  

S&P 500 had its 13th best yearly start since 1950 

South of the border, U.S. equities were also on a tear. The S&P 500 Index had its 13th best yearly start since 1950, while the U.S. total market index had a strong performance of 13.6% in U.S. dollars or 17.2% in Canadian dollars. 

Driven largely by soaring tech stocks, U.S. large and mid-cap growth names did especially well. They had an extraordinary 24.6% return as of June 30 in Canadian dollars compared to 10.1% for large and mid-cap value stocks. U.S. small cap stocks, however, underperformed. 

International developed-country large and mid-cap stocks also did nicely—up by 11.1% in local currencies. Small cap stocks trailed, however, with a performance of just 3.8%. Emerging markets stocks also performed well, gaining 11.2%; again, value and small-cap stocks trailed growth and large cap. 

“Vulnerable to a major correction” 

When François and I did our mid-year market review podcast on July 31, we wondered how long the outperformance would persist. “The noise in the financial media, from market analysts, is that valuations levels are stretched and are vulnerable to a major correction,” we said. 

Although no one can predict the future and the market is a random walk, the equity markets did correct sharply in the days after our podcast. 

In our next blog post, we’ll review what happened and share our advice on how to help protect your portfolio in times of turbulence. 

More detailed market statistics can be found on our Capital Topics’ website. Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.  

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.