New market highs – bah who cares?

Another week, another market milestone, the S&P 500 last week crossing 2,000 for the first time.

And yet, despite it tripling since March 2009, ordinary investors don’t give a hoot, a recent poll finding just 7 per cent of Americans are even aware stocks rose 30 per cent last year.

It’s a far cry from the heady days of 1998, when the index first crossed 1,000.

Then, Joe Sixpack was giving up his job to day trade the markets and investors everywhere were piling into stocks, having witnessed a tenfold rise over the previous 16 years.

Unfortunately for them, it took another 16 years for the index to double. Adjusted for inflation, the S&P 500 has averaged annual gains of just 1.9 per cent.

Investors who reinvested their dividends have done better – a 170 per cent return since 1998. Even then, however, real annual returns have averaged a below-par 3.7 per cent.

And that doesn’t account for fees, nor for investors’ lousy timing.

Everyone withdrew en masse from equities in 2008; figures show they did not return until 2013, four years after the rally began.

In other words, many investors likely earned zilch over the last 16 years.

Little wonder, then, the latest advance is being met with a shrug of the shoulders. European stocks for long run Poor as US returns have been, European investors can only look on in envy. The FTSE 100 continues to frustrate, hovering around 6,800, just below 1999's all-time high. British stocks have gone nowhere over the past 15 years, in contrast to the previous 15, when they rose sevenfold.

France’s CAC-40 remains more than a third below 2000’s all-time high. The Euro Stoxx 50 is some 40 per cent below levels recorded 14 years ago, while the Euro Stoxx 600 is also well shy of its 2000 high.

Irish investors have actually done better. Although the Iseq has more than halved since 2007’s high, it is flat over the past 14 years.

Only in Germany have returns come close to those seen in the US, the Dax (pictured) almost doubling since 1998.

Stocks usually do well over the long run, of course, but no doubt many investors will relate to Keynes’ quip that in the long run, we are all dead.

Yes, stocks are expensive While 15-year returns are poor, investors have done nicely over the past five years, so much so that valuations – particularly in the US – now look very challenging.

For example, Robert Shiller’s cyclically adjusted price-earnings ratio (Cape) suggests valuations are higher than 92 per cent of historical readings.

Stocktake readers will be familiar with the arguments around Cape, which averages earnings over 10 years.

Bulls say readings are artificially elevated by 2008’s freak earnings collapse; bears defend its inclusion, saying earnings were unsustainably high in preceding years.

Why not use a five-year Cape – average earnings over the past five years, thereby excluding 2008? Money manager Dana Lyons did just that, but valuations still look steep – more expensive than 88 per cent of the time, Lyons found.

A high Cape doesn’t mean the bull market is ending, Lyons finding 12-month returns following high readings to be little different to most years.

However, the longer-term picture looks bleaker.

There are other arguments against Cape, but the most commonly cited one just doesn’t hold water.

Snapchat's $10bn valuation Photo-sharing service Snapchat may have no revenues, but who cares? Some investors don't, new funding injections reportedly valuing Snapchat at $10 billion.

That’s “not absurd”, said Twitter chief executive Dick Costolo, citing Snapchat’s “crazy growth” and “clear monetisation path”. He could hardly say otherwise, given Twitter’s own indefensible valuation.

Believers point to Microsoft’s much-mocked investment in Facebook in 2007. Facebook’s valuation has since soared from $15 billion to $195 billion.

But so what?

There will always be the occasional big winner in any lottery, but that doesn’t justify $10 billion valuations for Snapchat, Airbnb, Dropbox, and Uber.

Some investors in glamour stocks get lucky, but most learn a painful lesson.

Undervalued at 52-week highs Seeing a stock near a 52-week high makes many nervous, investors assuming it may be overvalued.

Ironically, a new paper suggests the opposite, saying a 52-week high “serves as a psychological barrier, beyond which investors are hesitant to push prices”.

Analyst predictions of share price growth are much lower for stocks near 52-week highs than other stocks, the study says.

It also says investors underreact to positive news in stocks near 52-week high. Investors become pessimistic about earnings, with such stocks systematically beating estimates and going on to enjoy bigger returns.

In other words, don’t be nervous if your stock is near a 52-week high.

Be excited – it may be undervalued. See iti.ms/VPWOZM