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What’s Next for the Stock Market?

05032018 what's next?

What’s Next for the Stock Market?

The market ructions in early February were a genuine ‘shot-across-the-bows’ – a warning to investors about the longevity of easy credit, soaring asset prices and ultra-low volatility.  That’s why, with markets potentially on the verge of a big reversal, we think it’s prudent to hold more cash.


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[1] The S&P500 TR Index rose 26.46% in 2009, 15.06% in 2010, 2.11% in 2011, 16% in 2012, 32.39% in 2013, 13.69% in 2014, 1.38% in 2015, 11.96% in 2016 and 21.83% in 2017.

[2] Dropping the negative earnings of 2008 from the CAPE ratio and adding 10% growth to the earnings number for 2018, has the CAPE ratio still at over 30 times and above all levels ever with the exception of the dotcom boom.

[3] The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Grant Allison

    Roger, you have mention about the S&P500 and given examples to why it is over valued which I understand clearly but do you believe the Australian stocks are also overvalued to the same degree as the American stocks as they have not risen at the same pace as the US.

    • Hi Grant, in the event of a dislocation it matters little whether one market is as overvalued as another because, during dislocation, our analysis confirms there is a very low degree of variance in returns. In other words everything goes down together. If there isn’t a dislocation then of course its business as usually. We believe our Australian portfolio is a little above fair value – a little expensive. This means that we’d expect returns over the longer run from this portfolio of about 8-9% per annum. We are also holding a little more than 20% cash in our retail The Montgomery Fund. In other words we are finding it difficult to find new quality and value opportunities. I hope that helps.

  2. this article is very US focused Roger. Over the past 10 years or so the Aussie share market seems to get on board the rides down but becomes a bit MIA as the recovery plays out. I’d like your view on how much you expect any falls we suffer in Oz will be correlated with the potential falls in the US given the DJIA is 4x its 2009 low value and we’re still not at 2x. We both fell about the same when the crisis took hold which defeats the argument that they were coming off a lower low than us.
    These aren’t short term metrics I am referencing here as it’s now 9 years since those lows. I agree that the US is likely to see a significant correction but am concerned with our ‘selective’ follow the leader mentality here in Oz.

    • Hi Graham,

      In the event of a market correction/dislocation, it is almost completely irrelevant that the US market is up fourfold and the Australian market up only double. In a correction correlations can be almost perfect and variance of returns dwindles. The baby gets thrown out with the bath water because fear is indiscriminate. In the absence of a correction it is easy to see why we have not done as well s the US market; The Oz market is dominated in terms of weightings to the materials sector (17%) and Big four banks (27%). Financials (which includes the big four banks) make up 37%. Now, because the biggest companies have average payout ratios of about 80%, only 20% of profits are being reinvested for growth. That means that at best, you’d expect longer term gains to reflect the return of equity of these companies, which is about 15%, multiplied by 1-Payout ratio (20%) + dividends. In other words 15% X 20% = 3%, then add the yield of about 5% and you get about 8%. STrongs gains above this rate will be handed back, and annual returns below this rate will eventually be recovered. Hope that helps. You will enjoy reading this blog post on the subject: https://rogermontgomery.com/chasing-dividends-often-overlooks-growth-2/

  3. Hi Roger, a large part of my portfolio is with your funds and I trust your risk management approach. But for the equities I also hold I guess the challenge is whether to gradually reduce in anticipation of a correction, triggering capital gains tax or take an longer view (don’t need to cash in for a few years yet) and ride it out.

  4. Paul Andrews

    Hi Roger,Thanks for your ever-“valu.able” advice.

    In my portfolio I do have around 25% cash already after cashing out of most of my bank stocks early this year–however I didn’t pull the trigger on WBC and ANZ , which are continuing to edge further into the red.
    Are the big Oz banks , in your opinion , headed for much greater falls?–In other words would it be best to grit ones teeth and take a (roughly 8%) hit now –or continue hold these banks?
    My gut feel it to clean them out, but they are the only two out of 17 stocks showing negative (red) returns over the last 16 -18 months ,and they are hardly “speculative” stocks.

    BTW, after I liquidated my “traditional” portfolio and re-stocked with a bunch of stocks that complied with your “intrinsic value” and safety margins, paid a dividend, and showed consistent ROE, I am still showing 18% p.a. return even with the recent falls in broader market. Obviously “subject to change without notice”–but Thank you.
    It also helped that I waited to buy until the ridiculous “end of world” sentiment the days after Trump was elected (it was as if all commerce in the USA was going to stop overnight-clearly “irrational…whatever the opposite of “exuberance” is…)

    Anyhow thanks for your eminently sensible guidance , and I would be interested to hear you thoughts on our big banks at the moment.

  5. Thanks Roger for the valuable info… It has helped me a lot over the last few years. I remember reading a Benjamin Graham book where he taught us that when markets are high we should reduce our holdings and increase cash… Im am now living overseas and still following your great reads…

  6. Thanks for your insights Roger. But what does a person , in the rather awkward position of having cash to invest right now do?… Sit on the sidelines and wait (perhaps for another year or two or three) for a correction and buy in “cheap”…or notwithstanding the dangers of a correction, put the money (right now) into a fund with a higher than normal cash weighting??

    • Typically investors who wait for a correction before investing become afraid to invest when the correction arrives. That’s one reason an active and professional manager may be preferable. We of course don’t know whether a correction is coming but we do know that our cash is an option over lower prices, while the invested part of our domestic portfolio has been consistently outperforming the market. The cash has been a drag and will continue to be a drag if the market roars ahead. You will note the Montgomery Global Fund has been outperforming even when the cash is included and that’s because the overseas indices such as the S&P500 and the MSCI have significantly smaller weightings to materials sector companies. One thing to remember is that the higher the price you pay, the lower your return. With PE’s stretched on many stocks, it appears that low returns are likely. the only question is whether those low returns are smooth or accompanied by higher that recent volatility.

  7. I was hit by the .com boom and I did learn a hard lesson, so thanks to Rogers ongoing reports I keep a third of my own assets in cash. There is no glass ball to see into the future, only experience gained by listening to the wise and cautious. Thank you Montgomery team for your endeavors.

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