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  • Martin Sosnoff

Pray For A Wishy-Washy Market Where Nothing Much Happens

Yes! I know. Economists term the market forecast where nothing much happens as the naïve forecast. But, it's possible quicksand is ahead. I’m assuming Trump prevails, the Russians press their fight. The Federal Reserve Board looks for inflation under every rock, but finds zilch.

Wealth management arms of our four major banks hold to their traditional pie chart ratio of 60% equities, 40% bonds. They underperform their benchmarks, but nobody cares. Where can wealthy families go with their capital amassed outside securities markets? They rarely vote with their feet unless badly abused.

I’m the reciprocal of 60/40 investing. Presently, at a 40/60 ratio. The bond market seems more attractive than stocks selling at 20 times forward 12-month earnings power. Long-term Treasuries, AAA corporates remain in an historical range of attraction. 

Excepting Microsoft and Amazon. I’ll leave their Magnificent Seven to Buffett and his honchos.  Overvaluation of the NASDAQ 100 is bad for your health.

At 92, younger than Warren, it’s time to stop thirsting after Mammon. Read paperback books, and then toss them out the window of my trailer. After all, who am I to fix on the most productive mix of stocks and bonds next decade or so.

Well, lemme try my focus. First, I reviewed all my charts on investment returns, going back 50 or more years. What surprised me at first was how extended the cycle for stocks, bonds, inflation, and interest rates can elongate, running frequently for decades. Short term, changing your mix of equities and bonds makes no sense. The reason is trends in interest rates and inflation can be prolonged over 5 to 10 years, even more. 

What upsets a trend in force can be high inflation, harsh FRB application or the onset of recession. You gotta get off the bus at these times and leave your mistakes behind. Nobody blows the whistle to tell you when to check out.

Note how low interest rates in prime industrial bonds traded benignly around 4% in the 1960s, but reached 8% in the early seventies, creating the bitter recession of 1973-’74. Then, early eighties, our FRB unmercifully drove rates to 15%. Stocks collapsed and sold around 10 times earnings. Interest rates then coursed downward next three decades. Yes! Some 30 years of calm.

I’d draw the trend for rates at 5%. It’s near there, but not by much. In terms of yield, I wouldn’t disregard bond markets as a serious alternative to equity valuations.

The yardstick in overvaluation for me in stocks is their price-earnings ratio which looks now like 20 times estimated earnings power  for 2023. Welcome to the new year. Glancing at the industrial bond yield, now approximately 6%, even going back to the sixties, the five-year trendline approximates to 6%. 

Net, net, no need to fear forthcoming FRB policy. Bonds are OK, but stocks hang at a premium. I’m assuming a soft banking scenario. You can’t just own Apple and it’s ilk. 

In tech we are overweighted in Microsoft and Amazon.  NASDAQ 100 Index is scary. A handful of stocks account for over 70% of index weighting.  

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