A commentary from Todd Morgan, Chairman and CEO of Bel Air Investment Advisors. Bel Air is an investment firm that focuses on overseeing and managing over $8.7 billion in assets for 350 high-net-worth families, individuals and foundations, with a stated client minimum of $20 million in investable assets.
“It’s too early to call an end to the equity bull market.”
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“If there is going to be a recession—which I'm not predicting because it's almost impossible to predict when recessions happen—it's not going to be until the end of next year or the following year. And, the market doesn't usually react to a recession until 6-months before, so we're good for a while.”
“There has been no change in the valuation of the market, or the price of the market, in the last year and a half, which is good. There's also a lot of cash on the sidelines.”
“There is a lot of cash on the sidelines. The money has crept back in. Individual personal ownership is shrinking, and there's an enormous amount of cash for a few reasons: because of the uncertainty, because people see the market at all-time highs and because the noise from Washington D.C. is making people very nervous.”
“This tariff and trade war is something we haven't seen in modern times. The trade war is costing the world hundreds of billions of dollars. It's enormous, and neither side has a strong advantage, so it's hard to predict the outcome.”
“If you want to look at the fundamentals, which I think is the most important because the political situations are unpredictable at the moment, they are fair and reasonable. We have 16.5x market multiple and a 1.75% return on the 10-year. The corporate buybacks are enormous.”
“Enthusiasm usually shows the end of a bull market, and people are not enthusiastic about the market. It is evident by these recent IPOs that are all down. I think that is crucial as to why we like the market.”
“If I had to lay it down to just two things, we look at low interest rates, 1.75%, and a 16.5X P.E. multiple the market.”
“Think about this -- you're 80 years old; you're retired, your bonds are rolling over. That gave you 4%. Now you have to reinvest that money. You're getting half the income, and you depend on the income. What do you do? You diversify. You go and buy stocks, a yield 2% or more. It's feeding more money in the market by those people. I think this 1.75% yield is giving the market a foundation.”
“We have a very friendly Fed, which is extremely important. We have increasing earnings. Earnings could be up the next 12 months, as much as 5-10%. So, it's important to note that it's still an attractive period. Overpriced, not underpriced, the stock market has very low interest rates. There's not much alternative to put money to work.”
“In terms of our clients' mindset, I think we've all had a phenomenal year and clients are very happy with their returns. The returns in the equity market are 20+%. And they think of it only as this year – they forgot that last year wasn't up much at all. Last year, the Dow and market were down a little and we were flat, but they forget about that. So, if you take another two years, you're up 11, 12%.”
“We are telling clients to think long-term and stay the course. We're not reducing our exposure to equities yet.”
“Right now, the consumer is doing just fine. The consumer is spending money and is in good shape. They're 70, 80% of the economy. To have an impact, you've got to frighten them enough. 40% of the public like Donald Trump and say they love him because the market's going up. They made money and they're happy.”
“People are still frightened. They think they're buying at the top of the market. You can trace back all the reasons not to invest in the stock market, dating back to 1935–the great recession, the bombing of Pearl Harbor, WW2, impeachment, the killing of a president, in 2008, we were in terrible economic condition, mortgages, and so on. But, if you put $1 million in the market in 1935, today you'd have $5 billion. That's important to note.”
“If you would have bought the Dow Jones when I started my business in 1970, it'd be worth 25x your money. That's growing at about a 6.5, 7% annually on your money. Einstein said the greatest miracle in the world were compounding interest rates. So, I tell people, try not to think short term, try to think at least five years out.”
“If a new client comes in right now, we'd probably put at least a third to a half to work right away in the equity market. We put all the money into the fixed income to work in a shorter maturity. But we'd probably put a third to a half in stocks because we can't time the market.”
“We tell our clients every year that we expect to have a five or 10% correction, and they say, put my money in when you get a 10% correction. Well, we've been waiting for the 10%, and we haven't had this year. We had one last December; we were down 20. We do have some money on the sidelines waiting to back off, but the market has not accommodated us. So, I come back to my old, famous saying: the market will do whatever it has to do to prove the most people wrong.”
“We have a lot of interest in alternatives. People like real estate alternatives and multifamily real estate alternatives. We've gotten very good returns on those, and we still have a high demand for that. For real estate alternatives, we focus on national rather than regional because it's so expensive in Los Angeles and New York.”
“Looking to 2020, if you asked me today, at the end of October, what the market will look like a year from now, I say the equity market will be up 8%-10%.”
“October is historically a bad month for the market. It usually is the best time to buy because you get hit hard. We haven't seen that yet. Usually, I call it hurricane season, so you get prepared to buy, but it's been a pretty decent one so far. It hasn't been problematic. I think part of the reason is that there's so much cash around.”
“With all this rhetoric from the White House and the impeachment dialogue, the market is within 1% of the high. This shows that people need to invest, and they care more about investing than what's going to happen in the White House and the geopolitical issues.”
“In terms of the election, if Elizabeth Warren wins, some people say we'll be down 20, 25%, but that takes into effect that she can put through all of her ideas, and getting them through Congress will be an arduous task. We're looking out for the next couple of years. I think we're going to be okay.”
Bear market? “We would have to have a global slow down where earnings are declining, and the stock market goes down. You need a global slowdown. You need a reduction in earnings, and you need an unfriendly Fed. You need them to probably change the tax laws, so the corporate buybacks stop, and then, you've got a bear market.”
