(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
On Friday I got an email from a Reitmeister Total Return member with sentiments that are no doubt on a lot of people’s mind. That being our clear underperformance the last few weeks as the S&P seems to be relatively healthy while the rest of the market tanks (like the -8.73% slump for the Russell 2000 since the late June high of 2,334.40 to yesterday’s close).
Here is the general statement by the customer: DO SOMETHING REITY!
Here was my response with some modest additions in parenthesis for clarity:
You are correct on the past (that being our underperformance relative to S&P…but not to broader market decline as understood by the losses of the Russell 2000)…but disagree with the path forward.
Value investors (like myself) believe that the market is wrong quite often. Sometimes on individual stocks. Sometimes on whole sectors. Sometimes on EVERYTHING.
And thus we profit by taking advantage of those mistakes.
And thus if the market is wrong about shift to 2020 strategy of just buying FAANG and large cap and selling everything else…then the answer is NOT to join the party. The answer is to wait for folks to pull their heads out of their backsides and do the opposite. And that is where we will get the next surge of outperformance.
WHEN that happens is the greater mystery. And I can’t pretend I know when. Probably when we least expect it.
You certainly have the right to disagree. But at least you know with great clarity what I am doing and why.
All the Best!
(End of email response to RTR customer)
But Reity, why do you believe the market is wrong?
First, because I don’t believe the Delta variant will truly hamper the economy to any significant degree. That is because the rate of vaccination in the US is very high. And really the main issue with Delta is for those who have not been vaccinated. Thus, I expect this to lead more folks to get the vaccine.
Also most state and local governments realize after the first go around with Covid, that the cost of shutdowns to society is far too high. This should make it easier to greatly limit shutdowns to the entire population when only a minority of them are effected. And thus we do not have the makings worthy of a serious market sell off.
Second, EARNINGS YIELD!!!
We have discussed this concept as the #1 reason underpinning the current bull market. This includes earlier this month as in the RTR members only webinar where we talked about how low interest rates creates a TINA environment:
Alternative…to owning stocks
And that relationship only got STRONGER as bond yields dropped and the earnings yield of stocks only got more attractive. Here is the current math on that:
1.21% Yield on 10 Year Treasury
4.43% earnings yield for S&P 500 given 2021 estimates. However, not too early to start considering 2022 earnings estimates which would point to an even more attractive 4.94% earnings yield. Let’s remember that for the vast majority of history these two yields have been in parity. And thus stocks are a screaming value by comparison.
This is a straight up slam dunk for the stock market and why probably has a great deal to do with why stocks snapped back with gusto today.
Does that mean it’s all smooth sailing from here?
Of course not. But when you weigh out the risk/reward picture, given what I share above, it still STRONGLY skews to stock ownership as the best way to achieve an attractive rate of return.
It is for that reason that I did not buckle under the pressure of the recent market volatility allowing our portfolio to enjoy a healthy +3.1% return today. And I expect that as we look out 1-3-6 months into the future our healthy advantage over the market will likely increase even if there are some fairly nasty sell offs mixed in from time to time.
Here is wishing that today’s bounce has legs and we will tell a tale of ample stock gains next week. If not, and volatility returns, then don’t lose sight of the earnings yield equation that slants this market notably in a bullish direction.
Heck, even at the greatest depths of the Coronavirus bear market in March 2020 stocks bounced mightily. NOT because Covid was over. NOT because there were signs of an improving economy (in fact things were growing dimmer by the second). Rather it happened because low rates made investing in stocks the only logical choice.
Now with things FAR less grim than the spring of 2020, and rates recently pushed lower, it shouldn’t take much longer for investors to come back to the same conclusion that it is time to ride the bull higher once again.
What To Do Next?
The Reitmeister Total Return portfolio has outperformed the market by a wide margin this year.
Why such a strong outperformance?
Because I hand-pick the very best stocks from across the POWR Ratings universe. In fact right now there are 12 Buy rated stocks and 2 ETFs in the portfolio ready to excel in the days and weeks ahead.
If you would like to see the current portfolio, then start a 30 day trial by clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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SPY shares were trading at $433.50 per share on Wednesday morning, up $2.44 (+0.57%). Year-to-date, SPY has gained 16.71%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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