The late Sir John Templeton once commented that “the four most expensive words in the English language are ‘this time it’s different.’”
No truer words have ever been spoken.
It’s true for degenerate gamblers, drug addicts and serial womanizers. It’s true for politicians peddling failed policy ideas. And it’s true for ne’er-do-well employees or business partners who can never quite seem to get it together. No matter how many times they tell “this time it’s different,” it never is.
But perhaps nowhere is the quote more appropriate than in finance. This seems to be one area of human endeavor where people seem constitutionally incapable of learning from past mistakes.
Making loans to uncreditworthy borrows? Banks seem to do that about once every ten years like clockwork. In fact, they’re doing it now. Delinquent auto loans recently hit a new all-time high.
Lend money to perpetual basket cases like Turkey or Argentina? Bond holders seem to do that once per decade or so as well.
And getting caught up in the latest, greatest bubble?
Yes, that seems to be a rinse and repeat cycle as well.
Writing for Barron’s, Adam Seessel of Gravity Capital Management, commented that “reversion to the mean is dead.”
In other words, the classic value trade of buying beaten down, out-of-favor stocks and selling expensive hype stocks is over. Value investing no longer works:
As for returning to normal, does anyone really believe that is going to happen, for example, to Amazon.com or Alphabet? E-commerce and digital advertising still have only a small share of their global market, despite nearly a generation of growth. Other industries—ride-sharing, online lending, and renewable energy—are smaller still, but also show every sign of being long-term winners. How are these sectors going to somehow revert to the mean? Conversely, how will legacy sectors that lose share to these disruptors return to their normal growth trajectory?Reversion to the Mean is Dead
Seessel isn’t some wild-eyed permabull growth investor. By disposition, he’s more of a value investor. But after a decade of underperformance by value investing as a discipline, he’s wondering if it really is different this time.
It’s a legitimate question to ask. Not all trades revert to the mean. Had you been a value investor 100 years ago, you might have seen a lot of cheap buggy-whip stocks. But they ended up getting a lot cheaper as cars replaced horse-drawn carriages.
Likewise, might banks and energy companies today be at risk today from new disruptors like green energy and peer to peer lenders? And will the winners of the new economy just continually get bigger?
Well, maybe. Stranger things have happened. But before you start digging value investing’s grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.
Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.
The following is a snippet from Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:
There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.
“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.
As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much…
I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.
The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds.
Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Tech stocks rolled over and died not long after he published this, and value stocks had a fantastic run that lasted nearly a decade.
Today, I see shades of the late 1990s. The so-called “unicorn” tech IPOs this year were Uber and Lyft. Neither of these companies turns a profit, nor is there any quick path to profitability. These are garbage stocks being sold to suckers at inflated prices.
I’ll stick with my value and income stocks, thank you very much. And in Peak Income, we have a portfolio full of them.
This month, I added a new pick offering a 7% tax-free yield. That’s real money, and I don’t have to worry about selling to a greater fool.
To find out more…
This article first appeared on Sizemore Insights as This Time It’s Different
Note from Charles: I worked with Bill Washinski for years when I was living in Florida, and we collaborated on several research projects. In the spirit of the upcoming Avengers movie. I enjoyed his piece here on “the economics of Thanos,” and I hope you do too. –Charles–
Tomorrow, April 24, Avengers: Endgame, the sequel to the $2 billion hit movie Avengers: Infinity War will be released in China, with releases in the rest of the world to quickly follow. This brings to a climax a story line that has been more than a decade in the making, starting with 2008’s Iron Man
In all of the anticipation, there has been a lot of discussion around social media and other outlets about Thanos and the merits his plan to eliminate half of the population of every planet in the universe with “The Snap”.
To some, Thanos isn’t a villain at all. He’s a misunderstood hero doing what needs to be done to save humanity from the consequences of overpopulation and the exhaustion of resources. Indeed, throughout history many (if not most) conflicts have been fought over limited resources. And in an era in which global warming is one of the biggest and thorniest political issues, there are plenty of people out there who believe a smaller population is ideal.
It stands to reason that the Earth probably has a finite carrying capacity. There may be some upper population limit at which we’ve officially outgrown our planet.
It was 18th century demographer Thomas Malthus who first popularized the idea of the Earth reaching its carrying capacity. Mathusianism stated that “the power of population is indefinitely greater that the power in the earth to produce subsistence for man.”
Thanos made the same point in Infinity War: “It’s simple calculus, the universe has finite resources and if life is left unchecked, life will cease to exist.”
However, despite his omnipotent power, Thanos is lousy statistician. Had he bothered to check, he would have seen that the birth rate has been in a state of free fall since the U.N. began keeping track of it in the 1950s. This is a product of industrialization, as children in the modern era are no longer a source of cheap labor but rather a major expense.
The birthrate was 37.2 Births per 1,000 from 1950-1955, dropping nearly in half to 19.4 Births per 1000 from 2010-2015. This has nothing to do with declining resources as much as it does economic factors – it can cost $200,000 – $300,000 to raise a child in the United States (not including the costs of college education). Massive improvements in infant mortality also played a role, as parents felt less needs to have “spare” children.
But not only is population growing at a slower rate; some countries are actually shrinking. Japan’s population started to decline in 2011, and the country had a record low 15 million births in 2018. Western European nations average only 1.6 children per woman, which is not enough to replace the existing generation. So, it is only a matter of time before Europe as a whole begins to shrink.
Thanos tried to “fix” a problem that nature and economics seems to already be fixing on its own. We’ve already moved past a point of maximum growth.
Let’s look at other aspects of Mad Titan’s madness. His cutting out half the population could have drastic negative effects. In the movie he references how another character’s home world was a paradise after he culled the population. This is a short-sighted view, that a smaller population with more resources to sustain them made it a better world, is incredibly naïve.
Imagine if Thanos came and did his snap before Henry Ford developed the assembly line for cars or before Alexander Fleming discovered penicillin? What if Bill Gates was turned to dust before he created Microsoft or Steve Jobs before he created Apple? What kind of brilliant minds that could have made our lives more efficient and productive would have been suddenly ripped from existence before they could implement their products?
Imagine your world today before the smart phone or software that could increase your productivity and income or you were still behind a carriage on the way to work? Thanos may have made for an interesting villain and a great movie; but his solution of eliminating population also eliminates productivity and innovation – and this writer hopes the foolish and simple-minded snap is undone this weekend by a series of heroes that have earned a lot of respect over the years by some great minds leading the way like Kevin Fiege.
Oh no, what if Fiege was not head of Marvel Studios because he turned to dust? Perhaps there would be no need for this article then!
This article first appeared on Sizemore Insights as What Thanos Got Wrong
With one quarter left to go in 2018, there are three things on investors’ minds: the Fed, the coming mid-term elections and the ongoing trade war. Thus far, the market has mostly shrugged off these concerns, though income-focused investments such as bonds, REITs and dividend-paying stocks have had a hard time gaining traction.
Sizemore Capital’s Dividend Growth portfolio, which invests primarily in higher-yielding securities, has also had a hard time gaining traction in 2018. The portfolio returned 0.14% in the third quarter and 0.53% in the year-to-date through September 30. This compares to 7.2% in the third quarter and 9.0% year-to-date for the S&P 500 and 5.1% and 1.6% for the S&P 500 Value. [Returns data calculated from the performance of Sizemore Capital’s Dividend Growth model at Interactive Brokers; past performance is no guarantee of future results.]
Given its focus on attractively-priced stocks paying above-market dividend yields, I consider the S&P 500 Value to be a more accurate benchmark than the standard S&P 500. And frankly, it’s been a difficult market for value strategies.
Value vs. Growth
Over time, value strategies have proven to outperform.
This is not my opinion. This is empirical fact. In their landmark 1993 paper, University of Chicago professors Eugene Fama and Kenneth French found that value stocks outperform over time. More recent research by BlackRock found that in the 90 years through 2017, value has outperformed growth by a full 4.8% per year.
Figure 1: Value vs. Growth
But while value trounces growth over time, 90 years is a long time to wait. And there are stretches – sometimes long stretches – where value underperforms badly. We’re in one of those stretches today.
Figure 1 illustrates this in vivid detail. The graph shows the ratio of the Russell 1000 Value index divided by the Russell 1000 Growth index. When the line is declining, growth is outperforming value. When the line is rising, value is outperforming growth.
Value massively outperformed growth from 2000 to 2007, but it has struggled ever since. This has been particularly true over the past two years as the “FAANG” stocks – Facebook, Amazon, Apple, Netflix and Google (Alphabet) – have completely dominated the investing narrative.
I would love to tell you the exact date when the market will flip and value will start to dominate again. For all I know, by the time you read this, it might have already happened. Or that day might still be years away.
That’s not something I can control. But I can stay disciplined and focus on high-quality companies that I believe to be temporarily underpriced. And because my strategy has a strong income component, we don’t necessarily need prices to rise in order for us to realize a respectable return. The average dividend yield of the stocks in the Dividend Growth portfolio is 5.65% at time of writing. [This yield will change over time as the composition of the portfolio changes.]
As we start the fourth quarter, I am particularly bullish about some of our newer additions, such as Macquarie Infrastructure Company (NYSE: MIC) and Ares Capital (Nasdaq: ARCC).
Macquarie Infrastructure lowered its dividend earlier this year, which led investors to dump it in a panic. The shares dropped by over 40%, giving us a very attractive entry point.
Ares Capital, like many BDCs, has found the past decade to be difficult. But after a long, six-year drought, the company raised its dividend in September, and I expect further dividend hikes to come. At current prices, the shares yield a whopping 9.0%.
I also continue to see value in some of our long-held energy infrastructure assets, such as Energy Transfer Equity (NYSE: ETE) and Enterprise Products Partners (NYSE: EPD). Energy Transfer, in particular, is attractive due to its planned merger with is related company Energy Transfer Partners (NYSE: ETP). I believe this could be the first step to an eventual conversion from an MLP to a traditional C-corporation, which would potentially lower ETE’s cost of capital and allow for greater ownership by mutual funds, institutional investors and retirement plans like IRAs. CEO Kelcy Warren has indicated that this is the direction he ultimately wants to go.
I see the greatest risk in the portfolio coming from our positions in automakers General Motors (NYSE: GM), Ford Motor Company (NYSE: F) and Toyota (NYSE: TM). I consider all three to be wildly attractive at current valuations, but all are also at risk to fallout from the escalating trade war. As a precaution, I lowered our exposure to the sector earlier this year by selling shares of Volkswagen. But given the potential for a rally in the shares following a favorable resolution to the trade war, I feel it makes sense to hold our remaining auto positions and potentially add new money to them on any additional pullbacks.
All Eyes On the Fed
The Federal Reserve raised rates again in September, which was widely expected. But it was a subtle change to their statement that raised some eyebrows. They dropped the language saying that its policy “remained accommodative.” Does this mean that the Fed believes easy money is already over and that they’re not much more tightening to be done? Or does it mean that they’re about to get even more hawkish?
The statement was ambiguous. But it is noteworthy that the Fed is still forecasting another hike before the end of the year and three more in 2019. And Powell’s statements following the official statement suggest that he’s eager to continue draining liquidity out of the market.
There are limits to how aggressive the Fed can be here. If they follow through with raising rates as aggressively as they plan, they will push short-term rates above longer-term rates, inverting the yield curve. I don’t see the Fed risking that, as an inverted yield curve is generally viewed as a prelude to a recession.
Figure 2: 10-Year Treasury Yield
Meanwhile, bond yields have finally pushed through the long trading range of the past six years. The 10-year Treasury yield broke above 3.2%, a level it hasn’t seen since 2011.
I do not expect yields to rise much above current levels, as I do not see such a move justified by current inflation rates or growth expectations. But this is something I am watching, because the Dividend Growth portfolio, given its yield-focused strategy, is sensitive to changes in bond yields.
Looking forward to a strong finish to the year,
Charles Lewis Sizemore, CFA
Asness is the billionaire co-founder of AQR Capital Management and a pioneer in liquid alternatives. For all of us looking to build that proverbial better mouse trap, Asness is our guru. My own Peak Profits strategy, which combines value and momentum investing, was inspired by some of Asness’ early work.
Unfortunately, he’s been getting his butt kicked lately. His hedge funds have had a rough 2018, which prompted him to write a really insightful and introspective client letter earlier this month titled “Liquid Alt Ragnarok.”
“This is one of those notes,” Asness starts with his characteristic bluntness. “You know, from an investment manager who has recently been doing crappy.”
Rather make excuses for a lousy quarter (Asness is above that), he uses his bad streak to get back to the basics of why he invests the way he does.
As I mentioned, Asness specializes in liquid alternatives. In plain English, he builds portfolios that aren’t tightly correlated to the S&P 500. They’re designed to generate respectable returns whether the market goes up, down or sideways.
You don’t have to be bearish on stocks to see the value of alts. As Asness explains,
You do not want a liquid alt because you’re bearish on stocks or, more generally, traditional assets. That kind of timing is difficult to do well. Plus, if you’re convinced traditional assets are going to plummet, you want to be short, not “alternative.” In other words, liquid alts are a “diversifier” not a “hedge.”
You should invest [in a liquid alt] because you believe that it has a positive expected return and provides diversification versus everything else you’re doing. It’s the same reason an all-stock investor can build a better portfolio by adding some bonds, and an all-bond investor can build a better portfolio by adding some stocks.
I love this, so you’re going to have to forgive me if I “geek out” a little bit here. My professors pretty well beat this stuff into my head when I was working on my master’s degree at the London School of Economics.
When you invest in multiple strategies that aren’t tightly correlated with each other, your risk and returns are not the average risk and return of the individual strategies. The sum is actually greater than the parts. You get more return for a given level of risk or less risk for a given level of return.
Take a look at the graph. This is a hypothetical scenario, so don’t get fixated on the precise numbers. But know that it really does work like this in the real world.
Strategy A is a relative low risk, low return strategy. Strategy B is higher return, higher risk.
In a world where Strategies A and B are perfectly correlated (they move up and down together), any combination of the two strategies would be a simple average. If A returned 2% with 8% volatility and B returned 16% with 11% volatility, a portfolio invested 50/50 between the two would have returns of 9% with 9.5% volatility. That is what you see with the straight line connecting A and B. Any combination of the two portfolios would fall along that line (assuming perfect correlation).
But if they are not perfectly correlated (they move at least somewhat independently), you get a curve. And the less correlation, the further the curve gets pushed out.
Look at the dot on the curve that shows an expected return of about 8% and risk (or volatility) of 10%. On the straight line, that 8% curve would have volatility of about 14%, not 10%. And accepting 10% volatility would only get you a return of about 4% on the straight line.
This is why you diversify among strategies. Running multiple good strategies at the same time lowers your overall risk and boosts your returns. The key is finding good strategies that are independent. Running the basic strategy five slightly different ways isn’t real diversification, and neither is owning five different index funds in your 401k plan. Diversification is useless if all of your assets end up rising and falling together.
This article first appeared on Sizemore Insights as Why You Shouldn’t Put ALL Your Money into an Index Fund
The following is an excerpt from Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE).
Well, I should probably start this by mentioning that I no longer personally own the ETF I recommended in InvestorPlace’s Best ETFs for 2018 contest.
I recently sold my shares of the iShares Emerging Markets Dividend ETF (DVYE). While I still believe that emerging markets are likely to be one of the best-performing asset classes of the next ten years, it’s a minefield in the short-term. As I write this, the shares are down 4% on the year. That’s not a disaster by any stretch, but it is a disappointment.
There are a couple reasons for the recent underperformance in emerging markets. To start, the U.S. market remains the casino of choice for most investors right now. Adding to this is dollar strength. While dollar strength is good for countries that sell manufactured products to the United States, it’s bad for commodities producers, as a more expensive dollar by definition means cheaper commodities.
President Donald Trump’s trade war isn’t helping either. While it’s hard to argue that anyone truly “wins” a trade war, Trump isn’t incorrect when it says that our trading partners need us more than we need them. In a war of attrition like this, you “win” by losing less.
Of course, these conditions are not new, and virtually all of them were in place when I made the initial recommendation of DVYE. None of these factors would be enough for me to punt on emerging markets just yet. No, the problem is a greater risk that has only recently popped up: the twin meltdowns in Argentina and Turkey.
To continue reading, please see Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE).
This article first appeared on Sizemore Insights as Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE)
The following is an excerpt from Best Stocks for 2018: Enterprise Products Is a Keeper.
A 14% return is nothing to be ashamed of in a year where the S&P 500 is up only 8%. Yet it looks awfully meager when my competition in the Best Stocks contest is up 144%.
As I write, my submission in InvestorPlace’s Best Stocks for 2018 contest — blue-chip natural gas and natural gas liquids pipeline operator Enterprise Products Partners (EPD) — is up 14%, including dividends, as of today. Yet Tracey Ryniec’s Etsy (ETSY) is up a whopping 144%. Chipotle Mexican Grill (CMG) and Amazon.com (AMZN) take the second and third slots with returns to date of 71% and 68%, respectively.
So, barring something truly unexpected happening, it’s looking like victory may be out of sight this time around.
Can’t win ‘em all.
While Enterprise Products may finish the contest as a middling contender, I still consider it one of the absolute best stocks to own over the next two to three years. Growth stocks have dominated value stocks since 2009, but that trend will not last forever. Value and income stocks will enjoy a nice run of outperformance — and when they do, Enterprise Products will be a major beneficiary.
To continue reading, please see Best Stocks for 2018: Enterprise Products Is a Keeper.
This article first appeared on Sizemore Insights as Best Stocks for 2018: Enterprise Products Is a Keeper
I joined Peggy Tuck today on Straight Talk Money, and at the top of the agenda was Elon Musk and Tesla (TSLA). Tesla reported its worst loss in history, yet shares rallied hard as a more conciliatory Musk promised profits in the quarters ahead.
Musk, by the way, was the inspiration for Robert Downey Jr.’s Iron Man character from the Avengers movies. It’s debatable whether that makes Tesla stock worth buying.
In the next segment, we talk about Apple’s (AAPL) epic rise to $1 trillion… and whether it makes sense for billionaires like Amazon’s (AMZN) Jeff Bezos to keep substantially all of their net worth in their own company. My answer might surprise you.
In the final segment, we chat about the best places to invest should inflation make a comeback and look at a list of 10 stocks that have recently raised their dividends by at least 10%.
This article first appeared on Sizemore Insights as Today on Straight Talk Money: Elon Musk’s Tesla Turnaround and More
A more comprehensive version of this article covering all presidents back to 1889 was originally published on Kiplinger’s.
Mount Rushmore features massive 60-foot-tall busts of celebrated presidents George Washington, Thomas Jefferson, Abraham Lincoln and Theodore Roosevelt, each chosen for their respective roles in preserving or expanding the Republic.
But if you were to make a Mount Rushmore for presidents based on stock market performance, none of these men would make the cut. There really was no stock market to speak of during the administrations of Washington, Jefferson and Lincoln, and Teddy Roosevelt ranks as one of the worst-performing presidents of the past 130 years. In his nearly eight years in office, the Dow returned a measly 2.2% per year.
Just for grins, let’s see what a “stock market Mount Rushmore” might look like. And while we’re at it, we’ll rank every president that we can realistically include based on the available data.
Naturally, a few caveats are necessary here. The returns data you see here are price only (not including dividends), so this tends to favor more recent presidents. Over the past half century, dividends have become a smaller portion of total returns due to their unfavorable tax treatment.
Furthermore, the data isn’t adjusted for inflation. This will tend to reward presidents of inflationary times (Richard Nixon, Jimmy Carter, Gerald Ford, etc.) and punish presidents of disinflationary or deflationary times (Franklin Delano Roosevelt, George W. Bush, Barack Obama, etc.)
And finally, presidents from Hoover to the present are ranked using the S&P 500, whereas earlier presidents were ranked using the Dow Industrials due to data availability.
That said, the data should give us a “quick and dirty” estimate of what stock market returns were like in every presidential administration since Benjamin Harrison. (He ranks near the bottom, by the way, with losses of 1.4% per year).
|President||First Day in Office||Last Day in Office||Starting S&P 500*||Ending S&P 500*||Cumulative Return||Days||CAGR|
|* Dow Industrials used prior to President Herbert Hoover |
^ Data though 7/2/2018
|Calvin Coolidge||August 3, 1923||March 3, 1929||87.20||319.12||265.96%||2039||26.14%|
|Bill Clinton||January 20, 1993||January 19, 2001||433.37||1342.54||209.79%||2921||15.18%|
|Barack Obama||January 20, 2009||January 19, 2017||805.22||2263.69||181.13%||2921||13.79%|
|Donald Trump^||January 20, 2017||July 2, 2018||2271.31||2703.89||19.05%||528||12.81%|
|William McKinley||March 4, 1897||September 13, 1901||30.28||49.27||62.68%||1665||11.26%|
|George H.W. Bush||January 20, 1989||January 19, 1993||286.63||435.13||51.81%||1460||11.00%|
|Dwight Eisenhower||January 20, 1953||January 19, 1961||26.14||59.77||128.65%||2921||10.89%|
|Gerald Ford||August 9, 1974||January 19, 1977||80.86||103.85||28.43%||894||10.76%|
|Ronald Reagan||January 20, 1981||January 19, 1989||131.65||286.91||117.93%||2921||10.22%|
|Harry Truman||April 12, 1945||January 19, 1953||14.20||26.01||83.17%||2839||8.09%|
|Lyndon Johnson||November 22, 1963||January 19, 1969||69.61||102.03||46.57%||1885||7.68%|
|Warren Harding||March 4, 1921||August 2, 1923||75.11||88.20||17.43%||881||6.88%|
|Jimmy Carter||January 20, 1977||January 19, 1981||102.97||134.37||30.49%||1460||6.88%|
|John Kennedy||January 20, 1961||November 21, 1963||59.96||71.62||19.45%||1035||6.47%|
|Franklin Roosevelt||March 4, 1933||April 12, 1945||6.81||14.05||106.31%||4422||6.16%|
|Woodrow Wilson||March 4, 1913||March 3, 1921||59.13||75.23||27.24%||2921||3.06%|
|Theodore Roosevelt||September 14, 1901||March 3, 1909||51.29||60.50||17.95%||2727||2.23%|
|William Howard Taft||March 4, 1909||March 3, 1913||59.92||59.58||-0.56%||1460||-0.14%|
|Benjamin Harrison||March 4, 1889||March 3, 1893||40.07||37.82||-5.61%||1460||-1.43%|
|Richard Nixon||January 20, 1969||August 8, 1974||101.69||81.57||-19.78%||2026||-3.89%|
|Grover Cleveland||March 4, 1893||March 3, 1897||37.75||30.86||-18.25%||1460||-4.91%|
|George W. Bush||January 20, 2001||January 19, 2009||1342.90||850.12||-36.70||2921||-5.55%|
|Herbert Hoover||March 4, 1929||March 3, 1933||25.49||5.84||-77.08%||1460||-30.82%|
At the very top of the list is Calvin Coolidge, the man who presided over the boom years of the Roaring Twenties. Coolidge, a hero among small-government conservatives for his modest, hands-off approach to government, famously said “After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.”
It was true then, and it’s just as true today.
In Coolidge’s five and a half years in office, the Dow soared an incredible 266%, translating to compound annualized gains of 26.1% per year.
Of course, the cynic might point out that Coolidge was also extraordinarily lucky to have taken office just as the 1920s were starting to roar… and to have retired just as the whole thing was starting to fall apart. His successor Hoover was left to deal with the consequences of the 1929 crash and the Great Depression that followed.
The second head on Rushmore would be that of Bill Clinton. Clinton, like Coolidge, presided over one of the largest booms in American history, the 1990s “dot com” boom. And Clinton, particularly during the final six years of his presidency, was considered one of the more business-friendly presidents by modern standards.
The S&P 500 soared 210% over Clinton’s eight years, working out to annualized returns of 15.2%.
Not far behind Clinton is Barack Obama, who can boast cumulative returns of 181.1% and annualized returns of 13.8%. President Obama had the good fortune of taking office right as the worst bear market since the Great Depression was nearing its end. That’s fantastic timing. All the same, 181% cumulative returns aren’t too shabby.
Interestingly, the infamous “Trump rally” places Donald Trump as the fourth head on Mount Rushmore with annualized returns thus far of 12.8% It’s still early, of course, as President Trump is not even two years into his presidency. And given the already lofty valuations in place when he took office, it’s questionable whether the market can continue to generate these kinds of returns throughout his presidency. But he’s certainly off to a strong start.
After Trump, the next four presidents – William McKinley, George H.W Bush, Dwight Eisenhower and Gerald Ford – are clumped into a tight band, each enjoying market returns of between 10.8% and 11.3%. And the top 10 is rounded out by Ronald Reagan and Harry Truman, with annualized returns of 10.2% and 8.1%, respectively.
We’ve covered the winners. Now let’s look at the losers; the “Mount Rushmore of Stock Market Shame,” if you will.
Herbert Hoover occupies the bottom rung with a truly abysmal 77.1% cumulative loss and 30.8% annualized compound loss. In case you need a history refresher, Hoover took office just months before the 1929 crash that ushered in the worst bear market in U.S. history.
Don’t feel too sorry for Hoover, however. 1,028 economists signed a letter warning him not to sign the Smoot Hawley Tariffs into law… yet he did it anyway. This helped to turn what might have been a garden variety recession into the Great Depression. That’s on you, Hoover.
In second place is George W. Bush, with annualized losses of 5.6%. Poor W had the misfortune of taking office just as the dot com boom of the 1990s went bust and shortly before the September 11, 2001 terror attacks helped to push the economy deeper into recession. And if that weren’t bad enough, the 2008 mortgage and banking crisis happened at the tail end of his presidency.
Sandwiched between two of the worst bear markets in U.S. history, poor W never had a chance.
Rounding out the Mount Rushmore of Stock Market Shame are Grover Cleveland and Richard Nixon with annualized losses of 4.9% and 3.9%, respectively.
Nixon’s presidency was marred by scandal and by the devaluation of the dollar, neither of which was good for market returns.
Poor Cleveland, on the other hand, was just unlucky. By any historical account, he was a responsible president who ran an honest and fiscally sound administration. But then the Panic of 1893 hit the banking system and led to a deep depression. The fallout was so bad that it actually led to a grassroots revolt and to a total realignment of the Democratic Party. After Cleveland fell from grace, the mantle of leadership shifted to Progressives Woodrow Wilson and William Jennings Bryan, and the rest is history.
To see the full rankings of all presidents since 1889, see The Best and Worst Presidents (According to the Stock Market)
This article first appeared on Sizemore Insights as The Top 10 Presidents of All Time (At Least According to the Stock Market)
At the halfway point, 2018 is shaping up to be a good year for us. The first quarter was rough. In addition to the correction that dinged virtually all long-only portfolio managers, rising bond yields punished some of our more rate-sensitive positions, particularly REITs and MLPs. Though as yield fears subsided in the second quarter, the Dividend Growth portfolio recouped nearly all of its losses and entered the third quarter with strong momentum.
Through June 30, the portfolio returned 0.39% before management fees and -0.36 after all fees and expenses. Encouragingly, the returns for the second quarter were 7.92% gross of management fees and 7.17% net of all fees and expenses. [Returns figures compiled by Interactive Brokers and represent the real returns of a portfolio managed with firm capital. Returns realized by individual investor may vary based on account size and other factors. Past performance is no guarantee of future results.]
By comparison, through June 30, the S&P 500 index was up 1.67% through June 30 and up 2.93% in the second quarter.
So, while 2018 got off to a rough start, our portfolio has significant momentum behind it as we enter the second half. Our positions in energy — most notably midstream oil and gas pipelines — in real estate and in private equity managers have been the strongest contributors to returns. Our positions in European and emerging market equities have been the biggest drag on returns.
As a portfolio with a strong income mandate, the Dividend Growth portfolio is naturally going to have more interest-rate sensitivity than a broad market index such as the S&P 500. When yields are rising – as they were in the first quarter – this presents a risk. But when yields are stable or falling – as they were in the second quarter – it presents an opportunity.
The question we now face is this: What are interest rates likely to do in the second half of the year?
Ultimately, I expect that the path taken by interest rates will depend on two factors: inflation expectations and fears stemming from the nascent trade war.
I’ll address inflation expectations first. The unemployment rate has been hovering around the 4% mark for all of 2018. Traditionally, many economists have considered a 5% unemployment rate to be “full employment,” as there will always be some segment of the population that is either between jobs or not reasonably employable. Also, there are new would-be workers that come out of the woodwork (students, stay-at-home mothers, bored retirees, etc.) when the labor market gets sufficiently tight as it is today.
At 4%, we are significantly below “full employment,” which has led many economists to expect an uptick in inflation. Thus far, however, inflation has remained muted. PCE inflation (the rate used by the Federal Reserve in its decision making) has been running near or slightly above the Fed’s targeted 2% rate over the past six months, but it is not trending higher, or at least not yet.
If you’ve followed my research for any length of time, you know my view of inflation and the tools used to measure it. I don’t believe it is realistic to expect inflation at the levels seen in previous expansions due the demographic changes affecting the country. America’s Baby Boomers as a generation are well past the peak spending years of the early 50s. In fact, the front end of the generation is already several years into retirement.
The Boomers have been the economic engine of this country for over 40 years. As they retire, the borrow and spend less, taking aggregate demand out of the economy.
This isn’t purely academic. It’s been happening in Japan for over 20 years. Japan’s reported unemployment rate, at 2.8%, is even lower than ours. And Japan’s deficit spending and central bank stimulus absolutely dwarf those of America if you adjust for the relative sizes of the two economies. Yet Japan hasn’t had significant, sustained inflation since the early 1990s… when Bill Clinton was still the governor of Arkansas.
At the same time, automation technology and artificial intelligence is already eliminating jobs. Walk into a McDonalds today. You can order at a kiosk and never actually speak to a human employee.
At the higher end, Goldman Sachs reported a year ago that half of its investment banking tasks could viably be automated away.
While there are clearly exceptions in certain high-skilled jobs, the fact is that labor gets replaced by cheap technology as soon as it gets too expensive. It’s hard to imagine sustained inflation in this kind of environment.
Of course, this doesn’t mean that Mr. Market won’t decide to fret about it in the second half and send yields higher again. But I would consider any short-term weakness on higher bond yields to be a buying opportunity.
This leaves the fear of an economic slowdown. Right now, the economic numbers look healthy and there is no immediate sign of recession on the horizon. But unemployment tends to reach its lowest points near the end of the expansion. Furthermore, the Fed is aggressively raising rates, which is flattening the yield curve. A flat or inverted yield curve is a sign of economic distress and usually precedes a recession.
Does any of this mean a recession is “due” tomorrow? No, of course not. But it does suggest that we are late in the economic cycle, at a point when value sectors and higher-yielding sectors tend to outperform.
So, while I may make a few minor portfolio adjustments in the third quarter, I believe we are very well positioned at the half.
Looking forward to a strong finish to 2018,
Charles Lewis Sizemore, CFA