While the markets do not work via a calendar, we think there are several risks, such as an economic stumble in China or geo-political tensions, that could lead to volatility over the next few months. So long as the Fed does not raise rates too far or too fast, this volatility can be a good buying opportunity.
Against this backdrop, our outlook remains constructive and we think that investors should look past potential near-term volatility. Based on the S&P 500 Index’s current valuation, as represented by earnings yield, we think that the equity market can produce total returns near 8% annualized over the next few years. See our recent piece, What The Earnings Yield Can Tell Us About The Future, for more details on earnings yield.
If the markets decline, the potential return could move commensurately higher from that point. Similarly, we think that developed market equities offer attractive return potential as well. In the current low interest rate environment, we think that an 8% average annualized return over the next few years is quite attractive relative to other potential investments and could compound to about a 25% cumulative return with dividends reinvested.
THE CASH INDICATOR
The Cash Indicator (CI) continues to hover at very low levels as the equity markets have seen little volatility this year. Similar to other aspects of the markets, volatility is mean reverting. We have seen a small uptick in volatility recently due to geopolitical risks to levels that are more in line with historical trends and our expectations. However, the CI suggests that market declines are likely buying opportunities as long as fundamentals stay strong. Experience has taught us that volatility is necessary for healthy markets to persist and we think we are a long way off from a market dislocation that would trigger our CI.
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Data is provided by various sources and prepared by Stringer Asset Management LLC and has not been verified or audited by an independent accountant.