At Tralucent, we just about guarantee that the stock markets will correct almost every year between 7 to 10 percent, and sometimes even more.
What inevitably follows is the upturn, and we expect that the current correction in the stock market should be no different. The end to the Ukraine conflict is hopefully nearing, and slightly higher interest rates at a meagre 3 percent are unlikely to kill the economy. It is just a matter of time before investors realize that the stock market is still the best game in town, with an earnings yield of 6 percent or so.
The current malaise in the market:
Major indices such as the MSCI World Index and S&P500 are off about 17% year to date. Nasdaq, nearly 30%. We remind investors that some corrections happen almost once a year and larger ones like this can be as often as every few years – these can all happen without much warning. Despite the corrections, stock markets as measured by blue chips in S&P500 and Dow Jones Industrial Average have returned more than 10% per annum over long periods of time.
Below is our favorite picture: How a $1 investment in 1926 turned into $14,086 by the end of last year. All while society fought numerous wars, and lived through numerous interest rate cycles.
What matters most – earnings, earnings yield and expected returns:
We often remind investors that in the end, analyzing the stock market is all about looking at the earnings of the underlying businesses. On that score, world economies are strong, and businesses are reporting healthy levels of earnings. The earnings yield on the stock market is currently a solid 6.8%. Throughout history earnings yield has proven itself to be the best proxy for the real rate of return, and we expect that relationship to continue over the next 30 years. If we were to add inflation of say, 3% to the real yield then the expected return from the stock market is close to a solid 10%. This number compares very favorably to the meagre 3% offered by long term treasury bonds. Interest rates have moved up to the 3% level but are still not a competition for the stock market. The current Russian-Ukraine conflict cannot continue indefinitely. Soon these incidents will be behind us, and the markets will return to their positive behavior as they have done in the past.
Time to add to your holdings:
Our advice is to stay positive, to remember history, and to be fully invested. This weakness in the stock market is an opportunity to add to your existing holdings of the Tralucent Global Equity Fund. While in the short term, markets and our fund may go down some more, we see so many companies trading at compelling prices that we are eagerly adding to our holdings and looking forward to the sunnier days ahead.