Quarterly Commentary – July 2021
How can it get much better than this? For another quarter, the US stock markets, as measured by the Standard & Poor’s 500 Index (S&P 500) were once again on the rise. Keep in mind that the S&P 500 is invested entirely in stocks and as a market cap weighted index is highly influenced by the returns of just a handful of exceptionally large companies namely, Apple, Microsoft, Amazon, Facebook, Google, and Netflix. Having said that, returns for the quarter, year-to-date and 10 years ended June 30, 2021, are as follows:
|Ten Year Average Annual Return||+14.84%|
Average annual 10-year returns, for each ten-year period starting in 1926 is 12.06% and at first glance this could attract some alarm as investment returns have had an uncanny way of regressing to the mean (average) over most measurable time frames. In fact, some are forecasting this impending doom for the stock market and hence a dramatic fall in stock prices? Will this happen? Yes, at some point that will invariably occur. However, the key question is will that happen any time soon and even if we were to have a decline in overall stock prices would it really matter? Of course, it would be painful at the time but in the long run what impact would a sudden drop really have?
Witness what occurred from February 19, 2020 to March 23, 2020. When COVID-19 hit, and the entire world went into some form of lockdown financial markets tumbled and during that short six-week period the S&P 500 Index fell 34%1. We all lived through that and have seen the remarkable recovery. So again, could that happen again? Same answer as before, of course but once more with the same response, does it really matter?
I am often asked my opinion for future stock market returns and my answer over the years has been very consistent. Stock markets, over time have gone up. Not always in straight line but up nonetheless. Why am I so confident in that? Because stock prices are merely measured by buyers and sellers. If you have more buyers stock prices rise and if you have more sellers stock prices fall. Really a pretty simple concept. So, what causes more buyers than sellers? It is perceived value. This is true for most any commodity/goods/service. Does one person want that item more than another. When it comes to stocks this commodity is represented by a piece of paper that enumerates what percentage of ownership or share that you own of that particular company. Prices are then determined by someone wanting to purchase that share of ownership more than the next person and therefore prices are bid up to the highest offering level. If no one wishes to purchase stock in any particular company it therefore has no value. Again, a pretty simple concept. So why would a person want to outbid another to own that piece of paper? That is the proverbial $64,000 question but in reality, it comes down to the ability of that company to make more money than it costs to produce a particular product and that company therefore has earnings. By and large stocks are priced because that particular company has come up with the latest and greatest idea or their product or service produces earnings. So, what drives earnings? Many factors but above all, consumers. And that is what brings me to the point I want to make for this quarter.
I am optimistic about the growth of stock markets around the world because we have more consumers than ever and that number will more than likely continue to grow. Consumers are important because they buy stuff. Any type of stuff will do, just so buying occurs. Let’s take a look at some history and measure global population versus global Gross Domestic Product (essentially the value of all goods and services produced).
|Year||Global Population||Urban Population||Urban Pop. %||Non-urban Population||Non-urban Pop. %||Global GDP*||GDP per person of urban pop.||GDP per person of global pop.|
Inflation Adjusted, https://www.worldometers.info/gdp/#gdpyear
Since 1951, the world’s population has increased by over 5 billion people. However, what is far more significant is the percentage gain in the urban population from 30% to 56% of the world now living in cities and combine that with the growth of GDP per person within the urban population. These numbers above are all adjusted for inflation so in real terms the GDP per person in the urban population has almost tripled over the last 70 years and more importantly the GDP of the urban population is almost double that of the entire global population. What does that mean? More consumers. And what do consumers do? They buy cars, computers, televisions, smart phones, homes, appliances, clothing, on an on. True, with urbanization has come pockets of overcrowded and in some cases deplorable living conditions. That is not to be ignored. But on the grand scale the fact is that there are more consumers in the world than ever before and marketplaces that seemed distant and unapproachable are now within reach of competing companies worldwide to sell more and more to this new and growing group of consumers. That is why I am optimistic for the growth of stocks over the long run. More consumers mean more spending, which means continued global economic growth.
As always, if you have any questions, please feel welcome to reach out.
Past performance does not indicate future results. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by LPL Financial. as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The Standard & Poor’s 500 Index is an unmanaged Index of approximately 500 large US companies. An index is unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.