Tuesday, December 7, 2021

Morning Note: What Probabilities Favor in the Years to Come --And-- Beware the Crowd!

On several occasions herein we've illustrated what we believe to be the go-forward (long-term) unsustainable outperformance US equities have enjoyed over the rest of the world this past decade.

In part, it has to do simply with the law of averages (as we've charted in several videos), but it also has to do with present valuation levels and what history suggests about forward return expectations from here. And, not to mention, our longer-term view on the dollar, demographics, geopolitics, etc.

Here's from Vanguard's latest "Market Perspectives" piece. As you'll see at the bottom, they sympathize:  emphasis mine...

Market perspectives:
December 2021
Key highlights
  • Vanguard expects the U.S. economic recovery to continue in 2022, though at a naturally slower pace.
  • The Fed's tapering program sets the stage for what Vanguard believes will be a late 2022 interest rate hike.
  • We foresee inflation persisting above 2% toward the end of 2022, but broad wage gains taking hold could potentially push it higher.
Asset-class return outlooks

The greatest change in our outlooks from the June 30 running of the Vanguard Capital Markets Model® (VCMM) was in emerging markets equities. Large price declines in the intervening months lowered valuations, which are reflected in a 10-year forecast range that is 60 basis points higher in the September 30 running. In fixed income, yields increased marginally in the third quarter, allowing for a marginal rise in forecasts for many fixed income sub-asset classes.

Our 10-year, annualized, nominal return projections, as of September 30, 2021, are shown below. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.
Equities                                             Return projection
U.S. equities                                       2.3%–4.3%
U.S. value                                           3.1%–5.1%

U.S. growth                                       –0.9%–1.1%

U.S. large-cap                                     2.2%–4.2%

U.S. small-cap                                     2.2%–4.2%
U.S. real estate investment trusts        1.9%–3.9%

Global equities ex-U.S. (unhedged)     5.2%–7.2%
Ex-U.S. developed mkts (unhedged)   5.3%–7.3%
Emerging rkts equities (unhedged)      4.2%–6.2%

By the way, that's not small on a 10-year compounded annual basis...

Asian equities rallied overnight, with all but 1 of the 16 markets we track closing higher.

Europe's green this morning as well, with 18 of the 19 bourses we follow trading up, as I type.

US equities are higher across the board: Dow up 530 points (1.52%), SP500 up 2.00%, SP500 Equal Weight up 1.95%, Nasdaq 100 up 2.49%, Nasdaq Comp up 2.66%, Russell 2000 up 2.63%.

The VIX sits at 22.15, down 18.51%.

Oil futures are up 3.54%, gold's up 0.18%, silver's up 0.14%, copper futures are up 0.43% and the ag complex is down 0.22%.

The 10-year treasury is down (yield up) and the dollar is up 0.08%.

Led by MP (rare earth miner), uranium miners, ALB (lithium miner), oil services and semiconductor stocks -- but dragged by Verizon, AT&T and ag commodities -- our core portfolio is up 1.15% to start the day.

Beware the speculative mood -- and the crowd!!!

"So much, as I’ve said, is clear. Less understood is the mass psychology of the speculative mood. When it is fully comprehended, it allows those so favored to save themselves from disaster.
Given the pressure of this crowd psychology, however, the saved will be the exception to a very broad and binding rule. They will be required to resist two compelling forces: one, the powerful personal interest that develops in the euphoric belief, and the other, the pressure of public and seemingly superior financial opinion that is brought to bear on behalf of such belief.
Both stand as proof of Schiller’s dictum that the crowd converts the individual from reasonably good sense to the stupidity against which, as he also said, “the very Gods Themselves contend in vain.”"
--Galbraith, John Kenneth. A Short History of Financial Euphoria

Have a great day!


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