7 Insights From The J.P. Morgan Guide To The Markets (2Q17)

7 Insights From The J.P. Morgan Guide To The Markets (2Q17) by John Szramiak was originally published on Vintage Value Investing

Any good value investor knows that it’s impossible to time the market.

Even Warren Buffett is always quick to say that he has no idea what the stock market is going to do tomorrow, let alone next year.

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Still, good value investors also know that it’s important to know how healthy the economy is and whether or not investors’ sentiment matches up to that. Famous value investor Howard Marks of Oaktree Capital and author of the great value investing book The Most Important Thing calls this “taking the temperature of the market.”

One of the best resources for checking in on stock market and the economy is the J.P. Morgan Guide to the Markets, which is compiled every quarter and has a ton of great charts and data covering all aspects of the economy and various markets.

The J.P. Morgan Guide to the Markets for the 2nd quarter of 2017 was just released recently. Access a FREE copy of the Guide to the Markets for yourself below, and be sure to keep reading below the break to learn the 7 most important takeaways from the J.P. Morgan Guide to the Markets that I think you should know.

1. The S&P 500 is Still Overvalued As Valuations Continue to Climb

Check out the chart above. Compared to its 25-year long term average, the S&P 500 looks to be just slightly overvalued in terms of Forward P/E, Shiller’s P/E, and P/CF. The current forward P/E ratio of 17.5x is up from 16.8x at the end of 2016.

2. Tech & Telecom Stocks Look Relatively Cheap, Energy & Utilities Look Expensive

Guide To The Markets

Comparing trailing and forward P/E ratios to their long-term historical averages, technology stocks, health care stocks, and telecom stocks appear to be the most undervalued… and energy and materials look way overvalued.

3. There Have Been 7 Major Pullbacks in the Stock Market Since 2010… But Investors Have Shaken Them All Off

Guide To The Markets

There have been numerous instances over the past 6 years where the stock market declined in response to various global economic and political events. Here they are:

  • July 2010: Flash Crash, BP oil spill, Europe/Greece (-16%)
  • October 2011: U.S. downgrade, Europe/periphery stress (-19%)
  • June 2012: Euro double dip recession concerns (-10%)
  • June 2013: Taper Tantrum (-6%)
  • October 2014: Global slowdown fears, Ebola (-7%)
  • August 2015: Global slowdown fears, China, Fed uncertainty (-12%)
  • February 2016: Oil, U.S. recession fears, China (-13%)

And yet the stock market has continued to climb…

4. We’re Now in the 3rd Longest Bull Market in History… But with the Slowest Financial Recovery

Guide To The Markets

At 98 months (8.2 years!), this is now the 3rd longest bull market in history…

Guide To The Markets

…and yet the economic recovery has been by far the slowest.

5. Energy Firms are Out of the Red and Managing to Live with $50/bbl Oil

Guide To The Markets

Energy companies were in the black again for the second straight quarter in 4Q16. It seems that firms have rebalanced their budgets and are figuring out how to make money at $50/barrel versus the $100+/barrel prices that prevailed in 2011-2014.

Guide To The Markets

And after significant overproduction in 2015 (and to a lesser extent 2016),the EIA is projecting stability this year, with 98.2 million barrels per day of oil produced and 98.2 million barrels per day consumed in 2017.

6. We’re at Full Employment… But the Labor Force Participation Rate is Still Down

Guide To The Markets

Unemployment continues to drop and wage growth continues to slowly tick up. Unemployment has dropped from the peak of 10.0% in October 2009 to 4.7% as of February 2017 (essentially full employment, accounting for workers who are naturally unemployed as the move, switch jobs, etc.). Wage growth has been hovering around 2.5%. However…

Guide To The Markets

…the labor force participation rate has declined from 66% prior to the recession to 63% since late 2013. Most of this decline (2%) is due to people aging out of the workforce and retiring. However, the “Other” 1% is an unknown factor that cannot be explained by age or cyclical effects.

7. Active Managers Still Suck (For the Most Part)

Guide To The Markets

J.P. Morgan Guide To The Markets

Practically everybody by now knows about the index fund revolution. Vanguard, which helped pioneer the index fund, is taking in $1 billion per day from investors. Still, it’s nice to see a chart that shows why. The gray line in the chart above shows the percentage of large cap equity managers that are able to outperform the S&P 500 (the green line). As you can see, the gray line only passes the green line occasionally – more often than not, active managers can’t beat the overall stock market (fewer than 30% of managers in each quarter since Q1 2014 have outperformed the overall stock market).

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…