2Q23 International Value Strategy Newsletter: No Stock Market for Old Men

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One of the strangest things we have seen among investors is the willingness of older retirees in today’s stock market. On July 6, 2023, Anne Tergesen wrote an article in The Wall Street Journal on this exact subject titled “Older Americans Invest Like 30-Year-Olds”. She opens the article by writing, “Older Americans keep rolling the dice in the stock market, ignoring the conventional wisdom to protect their nest eggs by shifting more of their investments to bonds.” Retired investors were practicing this because, until more recently, they were receiving poor income from the bond market. They also feared what inflation could do to bonds.

Ultimately, they have bought into the cult of stock ownership or what we would argue is Jeremy Seigel’s Stocks for the Long Run camp. The idea is that inflation won’t affect stocks because companies can raise prices in a way bond investments can’t. Therefore, you voluntarily take more risks in stocks.

Anne provided interesting stats to understand the risk level they are taking.

Nearly half of Vanguard 401(k) investors actively managing their money and over age 55 held more than 70% of their portfolios in stocks. In 2011, 38% did so. At Fidelity Investments, nearly four in 10 investors ages 65 to 69 hold about two-thirds or more of their portfolios in stocks.

She went on to say, “And it isn’t just baby boomers. In taxable brokerage accounts at Vanguard, one-fifth of investors 85 or older have nearly all their money in stocks, up from 16% in 2012. The same is true of almost a quarter of those ages 75 to 84.”

The old adage for investors was that 100 minus your age should be your stock ownership. These folks are taking two to four times more equity risk than investors their age in the past. They are not thirty- or forty-year-old people. If you want to understand what it looks for someone to try to act younger, go see the new Indiana Jones movie, Indiana Jones and the Dial of Destiny. Harrison Ford acts in a scene where they’ve made him look much younger. For an action film, you find it very implausible for an actor that is in his 80s to do the stunts Mr. Ford does. You go along with it as a fan of Dr. Jones. Ford’s character does almost die. Should investors fear a near-death experience in stocks as well?

Their children had their own tumult in the last three years as the meme/Reddit phenomenon played out. Millions of millennials used Robinhood and other brokerage firms to gamble in stocks, options and other wagers in security markets. They had to learn a hard lesson that stock investing is tough and few are cut out to produce large success.

These things become self-fulfilling prophecies over shorter time periods. One baby boomer over-participates in stocks and tells their friends what they are doing. Their friends choose to practice that too and tell their other friends. This is how the over-ownership of stocks has continued among this cohort, particularly men.

We would argue this is similar to the over-ownership of stocks by this same group in the late 1990s, but they think they are taking way less risk today in the companies and the stock market they own. We find this all very damaging as these are not the people that can afford to have a big financial setback, but the stock market doesn’t care. It’s made to move money from weak hands to strong hands.

One way to look at the danger in the US stock market is a data point we have often shared with our investors over the last three years. It is equity ownership among US households. There is a negative relationship between household ownership and the S&P 500’s forward returns. There is not much meat on the bone for the old men over-owning stocks, but they don’t care as they hate bonds more.

The last point we will make is a possible longer-term issue for US common stocks. Corporate profits as a percentage of GDP have never been higher. Below is a chart looking at the total of interest and tax expenses divided by EBIT (earnings before interest and tax). The importance of this is that interest rates never get as low as they did in 2020, causing interest expense to be minimal. A massive headwind going forward in the capital structure of corporate America.

Second, the American corporate tax structure may possibly not hold the 21% corporate tax rate from the Trump tax cuts. Certain companies are already losing research and development costs that were offsetting their tax bill. This caused the tax bill to drift higher. The US government needs to find sources of funding for the stimulus it enacted during the pandemic. They might just take it from companies.

Rising interest expenses and higher corporate taxes would cause corporate profits to weaken. There is a strong correlation between corporate profits and valuation. Why are we explaining this to our fellow Smead International Value Fund investors who own non-US stocks? There may be a tailwind we haven’t seen in non-US markets for a very long time as the opportunity cost of stock market investing, the S&P 500, could look significantly less attractive.

At a time when old men act young and corporations have never had it better, we would argue to sit back and allow time to take its toll. As George Gilder says, “Money is time”. It’s the scarcest asset in the world. It’s the one thing old men should hold dearest. This fact reinforces that this is no US stock market for old men.

Fear stock market failure,

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The information contained herein represents the opinion of Smead Capital Management and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

Smead Capital Management, Inc.(“SCM”) is an SEC registered investment adviser with its principal place of business in the State of Arizona. SCM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which SCM maintains clients. SCM may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Registered investment adviser does not imply a certain level of skill or training.

This newsletter contains general information that is not suitable for everyone. Any information contained in this newsletter represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. SCM cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of this newsletter bears complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. All opinions expressed and information and data provided therein are subject to change without notice. SCM, its officers, directors, employees and/or affiliates, may have positions in, and may, from time-to-time make purchases or sales of the securities discussed or mentioned in the publications.

This Newsletter and others are available at smeadcap.com

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