Return Drivers for Stock Market
10/04/2013 6:00 am EST
Mike Dever of Brandywine Asset Management, discusses the differences between earnings growth and sentiment in the short and long term.
SPEAKER: My guest today is Mike Dever. Hi Mike, and thanks for being here.
MIKE DEVER: Thank you very much.
SPEAKER: I was reading one of your recent articles on your blog and you had on there three or four different return drivers for markets and I guess for the stock market in particular, and of course the one thing was the long term was based on earnings growth, which most of us realize that the stock market typically is anticipatory of what earnings are doing.
MIKE DEVER: What people don't realize is that earnings growth really only dominates stock prices over periods of 20 years or more.
SPEAKER: Yeah, that's a long time.
MIKE DEVER: Exactly, they focus on earnings, you know, season and different earnings coming up and in the short term it's only sentiment that's driving those prices.
SPEAKER: Yeah, and then that's another thing, with the sentiment, if everybody starts believing the market's going to go up, then everybody runs the market up and then that's usually the time when most of us in the business get out of it.
MIKE DEVER: Yes, right.
SPEAKER: But what are you seeing today in terms of sentiment?
MIKE DEVER: Well, we've got a strategy that we publish on the web site if you look in the action section that looks at sentiment and specifically we're looking at the aggressive ETFs trading in stocks, so the triple average and the inverse ETFs, and when you see a lot of money flowing in to the long side, say out of the inverse and into the leveraged long ETFs, you're nearing the top. It might be short term, but you're near the top, and vice versa for buying. We got a signal about two weeks ago for a sell and stocks based on that strategy, okay, so that's a trading strategy used in US equities that's derived from capturing sentiment as measured by money flows in and out of leveraged ETFs.
SPEAKER: Okay, and then you also quote dividends, that dividends play a big part also -
MIKE DEVER: Absolutely.
SPEAKER: - in where the market is going, and has that always been the case or is that more so now, do you think?
MIKE DEVER: It's actually a little less so now.
SPEAKER: Is it?
MIKE DEVER: It's always been the case. There were periods where you had 4% annual contribution by dividends. It got down in the late '90s to under 2% when the stocks became very inflated. It's back up to a more normal mid 2's kind of range right now but it's really one of the primary drivers of overall returns of investing in stocks.
SPEAKER: Well, then, what's kind of interesting because I'm an old time value girl and in the old days there were no technology companies that paid dividends, and I read something this morning that said if you're going to buy Apple now since Carl Icon and George Sores have, that you would buy it as a dividend stock.
MIKE DEVER: Isn't that funny?
SPEAKER: Yeah, it's very interesting.
MIKE DEVER: Everybody's starting to pay dividends. Nobody wants cash laying around in their company anymore.
SPEAKER: Right, yeah, exactly, and I think one of your other drivers was short term, the PE ratios?
MIKE DEVER: Right, which is really the sentiment measure that I had talked about, so you can measure sentiment by PE ratio. PE ratio doubles, clearly there's just higher enthusiasm, more positive enthusiastic sentiment for owning stocks than when it's lower, and you saw that really peak in the late '90s.
MIKE DEVER: It never really troughed out at historic lows at all. It got down into the teens for the most part but it didn't get into those single digits like it has historically in the bear market in the past.
SPEAKER: Okay, and in that same article you talked about the projection I think up to 2020 that may be the S&P was going to go up 7, somewhere around 7%, 7.05% as an annual basis, and I know a lot of people just look at that because most investors tend to be very narrow-minded in terms of, oh, I can only invest in the US stock market, forget about anything else, but that's really not how you manage money.
MIKE DEVER: Right, no, our philosophy is diversify across a hundred plus markets using dozens of different return drivers and trading strategies, meaning that to us the US stock market is just one of a hundred, and we're not just sitting there long and holding it forever. We've got strategies that tell us when to be long and when to be out or when to be short, but it's just on equal footing essentially in the portfolio with the other hundred markets that we're trading.
SPEAKER: The epitome of diversification then.
MIKE DEVER: Absolutely. I mean, diversification is the one free lunch in investing.
MIKE DEVER: It does give you the ability to get greater returns and less risk, where if you focus on a single market you're taking on unnecessary risk. It's really the title of my book, Jackass Investing, has to do with taking unnecessary risk with your money and just holding long stock positions or concentrated positions in the portfolio, 50% stocks for example, that's gambling, that's taking on unnecessary risk.
SPEAKER: Exactly, and there's no reason to do that.
MIKE DEVER: Don't have to.
SPEAKER: Absolutely. Thank you.
MIKE DEVER: You're very welcome.
SPEAKER: And thanks for joining us at the MoneyShow.com video network.
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