This is the first ever quarterly update from Meredith Wealth Planning. Assuming I stay in this position for about 30 more years, you can expect about 119 more of these.
Much has transpired since I launched the firm in early March. I am proud to say the business has been a success thus far, as we currently have around 95 client households and $46 million in assets under management. On May 24th my wife and I welcomed our daughter, Cecilia June, to the world. She’s pretty stinkin adorable, and her big brother (who turned 3 yesterday!) is very proud of her.
Investments and markets should not be judged every quarter or even every year, and the point of these quarterly updates is not to suggest portfolio changes or where you should be positioned next quarter but to timestamp a few current thoughts. If nothing else, it will be entertaining for myself to revisit them a few years down the road.
First thought: The Fed
The Federal Reserve Bank seems a bit obsessive with dampening any potential volatility from the economy. We have very low unemployment, more job openings that the number of people looking for work, a stock market near an all-time high, and the Fed is considering cutting rates (If you listen closely you can hear Ron Paul pounding his fist in disgust). The Fed argues that they are proactive and need to get out in front of an economic downturn, and we appreciate that, but can the Fed be expected to forever remove the booms and busts of the US economy?
For instance, on Friday June 7th a disappointing jobs report was released. Instead of the market dropping from the bad news, the headlines stated that markets rallied because they thought a bad jobs report would lead to interest rates cuts from the Fed. That may not be why the market really went up, but if bad news is good news and good news is good news, then have downside risks been removed? Doubtful.
Anonymous market analyst, Jesse Livermore of Philosophical Economics, said in a recent interview that he believes inflation and interest rates will stay low “forever”. At the present time, it does seem that way. What are the market implications if we never see high rates or inflation again? I’d imagine permanently higher valuation multiples. This leads to my second thought…..
Second thought: Valuations
If interest rates and inflation are expected to be subdued forever, equities should trade at a permanently higher multiple. Are equities highly priced at the moment? They are at or near all time highs on the broad market indexes but valuations are not incredibly high. Here is the data from JP Morgan as of June 25, 2019.
|Latest||25 year average|
|Forward Price to Earnings Ratio||16.60||16.18|
|Price to Book Value||3.10||2.94|
|Price to Cash Flow||12.31||10.65|
Different segments of the market trade at different valuations, some size and style boxes may look cheaper than others. Here’s that data as of June 25th:
Looking at those boxes you might argue that small value stocks are discounted a bit compared to small growth. Of course there’s more to that story, but we won’t get into that right now.
Since around mid 2011 the US stock market has significantly outperformed the rest of the globe. This leads investors to wonder why they own any foreign stocks. As more of the masses reduce their foreign stock holdings, those share prices become discounted a bit relative to US. The norm is for foreign stocks to trade at a lower multiple, but the gap has widened a bit. Here’s a snapshot as of June 25th:
|PE Ratio||20 year average|
Based off this simplistic view of things, the rest of the globe is trading slightly below its 20 year average while the US is slightly above.
However, there is definitely no free lunch. The market does not give away excess returns that easily.
Third thought: TO INFINITY AND BEYOND MEAT
Yes I just saw Toy Story 4 yesterday, but Buzz Lightyear did not disclose any holdings in Beyond Meat stock.
The company went public at $25 a share just at the beginning of May and now it’s around $163.
This is a company that had about $88 million in sales last year, and the market is valuing it right now close to $10 billion, giving it an obscene price to sales ratio. Could a price to sales ratio of 113 ever be justified? Of course, you just need incredible sales growth. They expect to do over $205 million in revenue for 2019, which would cut the price to sales ratio to about 49 if the valuation stays the same (although no one invests in stocks expecting them to stay the same).
We won’t discuss a price to earnings ratio, as they do not have any earnings. Since the company was founded in 2009, they have never produced a profit and likely won’t for quite some time. Having said that, the global meat market is huge, and gaining any substantial portion of it could be very profitable one day, but how long will investors wait? Do they even care if the company becomes profitable or are they just buying in the hopes someone pays more for the shares later without any respect to underlying business fundamentals?
Final thought: Political Battles
It’s going to be a long campaign season until November 2020 gets here. Just like every other presidential election, each candidate will tell you how bad America is and how they will fix it all if they are elected. Then 4 years later, new candidates will come and tell us again how bad America is and how they are going to fix it. Lather, rinse, repeat.
It’s best to not let any politician influence your investment decisions.