The Capitalist Investor - Episode 37

The question in everyone’s mind as they await the approaching election is: “What’s next for my investments? Where does the market go from here?” The stock market is seeing gains that won’t be reflected in the economy for a while. In this episode of the Capitalist Investor, we talk about where the market was during the Obama administration, where it is now, and future realistic projections. Don’t miss it!

Outline of This Episode

  • [0:41] Where does the market go from here?
  • [6:10] Why you should trim your positions
  • [7:12] The Obama and Trump administration returns tell us…
  • [16:23] What Wall Street is projecting for 2021
  • [20:12] What catalysts could take the market higher?

Where does the market go from here?

Before the great recession, the S&P hit a peak of around $1,565 in Oct. 2007. After the great recession, it took almost 6 years to get back to that level. This go-around, it’s only taken 6 months to get back to the previous high. The moral of the story? Even though the market has rebounded quickly, there are clear winners and losers in this recovery. Don’t blindly plunge money into index funds right now.

As you’re looking at the stock market in general you need to favor active management versus passive. You’re always going to own some losers—no one can bat 1,000. So you need to start with an exit plan. For example, if you buy Apple at $400 a share, you want to set parameters for when you start cashing out some of the profit. If it goes to $300, you take some money off the table. Or, if it moves the wrong way 10% you close the entire position. You need to know:

  • Why are you buying a stock?
  • What are your expectations for it?
  • When would you cut your losses?

Above all, do not get emotionally attached to the investment or you’ll rationalize going below your set number. Your emotions will get tested at the bottom and it’s hard to admit defeat. But ultimately, no gain is real until you sell it and put some cash in your pocket. 

What the Obama and Trump administration returns tell us

What happens if Trump stays in office? What happens if Biden wins? How will either impact the stock market? If you take office when the market is at the bottom, your performance will look great. The market accelerated quickly while Obama was still in office because the market knew that Trump was taking over.

So we’re looking at the years between when Obama was elected in November of 2008 and Trump was elected in November of 2016. The advertised total return on the S&P during the Obama presidency was 159% (which is a 12.6% annualized rate of return) when in fact it was only 66% (or 2.25% annualized).

A lot of people claim that during the Obama presidency the economy was great. But you can’t ignore the fact that he started at the bottom. If I go back to the high in October of 2007 through the end of his presidency, the annualized return was really 5.7%. The #1 determinant of performance is where you get in and where you get out. People can manipulate the numbers to their benefit.

Where are we now? The S&P 500 was almost $3,400 in February and around $2,300 at March lows—but now we are back up to $3,400. The Trump return is at 70% (4% greater than Obama’s) for an annualized return of 15.11%—only 4 years into his presidency. Why are things going so well? Listen to hear our take.

Looking at market projections

The market is typically priced on a multiple of the next 12 months of projected earnings. In 2019, we were at earnings of $163 for the S&P 500. For 2021, Wall Street has projected $164 in earnings. It would be a record-high number—and it’s never going to happen. Our investment team is thinking a projection of $140-$150 is more realistic.

If we are at $150 next year and applied a generous forward multiple of 20x earnings, that’s a $3,000 year-end target. Even if multiples are higher, at 22x or 25x, there’s not much we can do to get to a $3,400 year-end target. My take? The stock market has pulled future returns into the last 6 months. Will we get double-digit returns? Probably not. The fact that we are back to even is remarkable. If we start 2021 at a high valuation it will be difficult to see the high returns of previous years.

What catalysts could take the market higher? Listen to the whole episode to find out!

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Show Notes by

Keep Listening to The Capitalist Investor:
Episode 15:
Spending Strategies in a Bear Market, Ep #15
Episode 31:
Handicapping the 2020 Election, Ep #31
Episode 47:
11 Investments in Your Home That Pay Off, Ep #47
Episode 63:
Jeff Bezos and Amazon: Past, Present, and Future Ep #63
Episode 79:
7 Ways Biden Plans to Tax American Families (Part II), Ep #79
Episode 95:
5 Beaten Down Stocks to Buy on the Dip, Ep #95
Episode 111:
Special Episode – Talking Energy with Daniel Turner, Ep. #111
Episode 127:
Retail Earnings Tank & What The Heck is Greenflation? Ep. #127