November 2018 Update

Equity markets are declining as expected, relieving some of their record over-valuation. The cause of October’s decline has been attributed to higher interest rates coupled with slower economic growth -- topics I have been writing about for some time now. By and large, the selloff so far has been orderly, without a sense of panic that traditionally marks a “bottom” in stock prices. Given the degree of over-valuation still remaining, and dwindling liquidity in daily trading, I expect that popular indices will continue lower over time until I observe more indicators of exhaustion. I expect to see many sharp and forceful rallies higher along the way, which is characteristic of bear markets. Also characteristic of bear markets is that these rallies progressively make lower highs, establishing a downtrend.
 
The goods news is that capital is flowing back from growth stocks to value stocks. This is what we should expect in a market that is becoming more rational in regard to valuation. This has helped our performance recently. Bonds are also doing much better relative to stocks. If I am correct in estimating that stock indices may only deliver a -2 to 2% annualized return over the next ten years, then owning a government bond yielding 3% annualized is a compelling offer, particularly for institutional investors.
 
In the 85 years since the first publication of Security Analysis by Graham and Dodd, value investing continues, unequivocally, to be the best style of investing when measuring the performance of long term returns. Sometimes the public loses track of the guiding principles of value, and becomes fooled into following short term fad investment styles such as high revenue growth, or naïve momentum. Each time that investors mis-calculate, it is value investing that returns to restore the function of markets and the credibility of market prices. As we proceed together through this bear market, it is important to keep in mind that this is the market’s way of correcting years-worth of prior excess, and restoring trust in capital allocation. In other words, value investors should welcome, and certainly not fear, bear markets, for they provide the breeding ground for future returns and rational investing.

Interesting links:
An in depth look at over-extended market valuation https://www.hussmanfunds.com/comment/mc181002/
Why government bond prices are likely to rise, and yields fall https://www.advisorperspectives.com/articles/2018/10/08/a-roadmap-for-the-upcoming-u-s-treasury-bull-market-1

Cordially,
 
Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth