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Mark Biller

Mark Biller

Executive Editor

Mark joined SMI in 2000. He leads SMI’s overall content strategy, managing the editorial direction and writing many articles. He led the company’s efforts to create its first web site, helped develop several of SMI’s investment strategies, and has been a contributing author to the Sound Mind Investing Handbook. 

In addition, Mark helped design and launch the three Sound Mind Investing mutual funds. He has served as the Senior Portfolio Manager since the original SMI Fund was launched in 2005.

Prior to joining SMI, Mark worked at Tax and Accounting Software Corporation. 

Mark received an undergraduate degree in Finance from Oral Roberts University.   

Mark and his wife, Cindy, have three children at home.

Most Recent Articles

Stock Market Valuation Review

Stock market valuations have risen so much over the course of this now 8.5-year bull market that we're concerned about the implications of today's prices on future returns. This is a normal part of the bull/bear market cycle and dynamic, but it's easy to lose sight of when the bull market music is playing and everyone is happily dancing and enjoying their recent gains.

Unfortunately, it's as iron-clad a law as exists in investing that the price you pay for something today dictates the return you'll get from it tomorrow.

What trips up some investors from understanding or believing this market truism is the fact that the effects are not typically immediate. As we've reminded readers many times recently, high valuations are a poor timing signal in terms of letting us know when the market is likely to turn lower. High prices can stay high for an extended period of time, and can continue to get still higher. But that doesn't diminish the predictive ability of high valuations to tell us what returns over the longer-term are likely to be as a result of today's high prices.

Normally, in the case of the stock market, this price adjustment dynamic includes a painful bear market that readjusts prices for stocks significantly lower.

Checking the charts

It's been a while since we've looked at the current status of some of the more prominent valuation indicators, so we're going to do that today. I'm going to borrow a number of charts from a recent report by Steve Blumenthal of CMG Capital Management Group. You can find the full report here, and I'd add that if you enjoy wading through these types of charts and facts, Steve's On My Radar report has become one of my favorite weekly reads. (And it's free to sign up for as well, so you can't beat the price!)

First up is a simple chart showing future returns based on current P/E ratios (that's price/earnings ratio). Data is from 1926-2014, using monthly median P/Es. I'm including it first to establish the direct relationship between today's prices and tomorrow's returns. Maybe not next month or next year, but extend the period out long enough and the relationship is rock solid. When current P/Es are low (Quintile 1), future returns are high. When current P/Es are high, future returns are low. The market sits solidly in Quintile 5 today.

P/E ratios can be tricky to decipher, which is why I wrote a detailed primer on the different types and what they're good for earlier this year (The Truth About P/E Ratios). That article may be worth a quick read if you find any of this post confusing.

While the table above uses conventional P/Es, another type that we highlighted in that earlier article is the Shiller P/E, which looks back over 10 years of earnings data to smooth out the peaks and valleys somewhat. Unfortunately, the picture doesn't get any better using the Shiller P/E, as the chart below shows. Looking back to 1880, we see that the market's current Shiller P/E (as of 11-10-17) has now surpassed that of 1929's "Black Tuesday" and lags only that of the pre-2000 dot-com bubble.

Next up is a sort of hybrid of the first two charts. This one uses Shiller P/Es, but arranges them in a similar "future 10-yr returns by quintile" format. Again, from our current starting point, the prognosis for the market as a whole is not particularly bright.

This next chart looks at stock ownership as a percentage of household financial assets. The basic idea here is that when most people are already highly invested in stocks, there aren't many potential buyers to push prices higher. The blue line shows the equity percentage (left axis), while the dotted black line shows actual returns over the subsequent 10 years (right axis).

It's a little tricky to read, but basically shows that when investors are as heavily allocated to stocks as they are today, future returns tend to be quite low. By this metric, we're basically sitting right where we were in 2007, immediately prior to the huge 2008 bear market.

There are a number of other charts/metrics in the full report, all telling the same story. I'm going to finish with this one, primarily because of the data in the yellow oval showing how far the market would have to correct to reach various levels. According to Ned Davis Research, the market would have to fall -28.3% to reach fair value.

Of course, markets often overshoot when making dramatic moves, which is why the -50.4% move to get to a level one standard deviation below fair value is sobering. Given that we're more than one standard deviation above fair value at present makes that seem like a not-unreasonable possibility during the next bear market.

Conclusion

As I wrote last week, the point of all this isn't to alarm you or try to convince you to sell stocks. Rather, it's to combat the euphoria that often takes over near market peaks when returns have been rosy and it's difficult to imagine that the future might look different than the recent past.

It's hard to favor conservative strategies like DAA right now, given returns of more aggressive strategies have been higher. But those conservative strategies are absolutely the key to helping us navigate the dangerous bear market that likely lies ahead in the not-too-distant future.

Thankfully, if you have a healthy allocation to risk-sensitive strategies (such as DAA), you don't have to feel like you have to take a lot of pre-emptive action. Keep following the strategies as they're laid out and start keeping a close eye on the overall risk level of your portfolio.

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We Interrupt This Bull Market to Remind You…

These are heady times for stock investors. Today's one-year election anniversary marks a robust 28.5% gain for the Dow Jones Industrial Average over that time. Even more remarkable, SMI's Sector Rotation is up a stunning 85.5% in that time!

When investors are enjoying these types of gains, it's tough for them to listen to the voice of reason. But the unfortunate reality of investing is that big gains don't reduce future risk...they increase it. If stocks were risky a year ago (and they were), they are that much more so after another year of growing toward the sky.

SMI readers have heard our many cautions regarding market risk in the current environment, so I'll keep this brief(er) by limiting myself to just two thoughts, neither of which I remember discussing at length before.

First, the U.S. has experienced at least one economic recession in every decade since 1850. Some decades had more than one, but every decade has had at least one. So far, the 2010-2019 decade is the lone exception. If we make it through the next two years without a recession, it will be unique in the past 170 years.

Keep in mind that the U.S. stock market typically peaks roughly one year before economic recessions begin. By definition, then, if we see a recession within the next two years, that would imply a stock market peak sometime in the next year.

That said, there are no particularly worrisome signs of recession on the horizon. Markets love political gridlock and expanding earnings, both of which are present right now — largely explaining the big gains of the past year. These gains could well continue. For that matter, there's nothing magical about the "recession every decade" idea other than the fact that it shows downturns happen with a certain regularity which we've been able to push off lately. The current economic expansion is the third longest on record; if it lasts through the end of 2019 it will become the longest. It could happen. But it might not be smart to expect it to.

Second, we've emphasized that the change in central bank policy from accomodation to tightening that began in earnest last month when the U.S. Fed started intentionally shrinking its balance sheet is a big deal. Not so much in its immediate impact, which is starting off quite modest (and is more than offset by the continuing stimulus from the European Central Bank and Bank of Japan). But as with QE on the expansion side, the Fed's move has signalled the other central banks to start discussing their own exit strategies from this decade of propping up the economy and financial markets with central bank largesse. If all goes as these central banks have currently outlined, roughly a year from now the world will be facing a net tightening of central bank capital for the first time since the financial crisis.

It's unfortunate that the numbers are so big that they're barely relatable, but the net impact of this shift is that the financial markets will go from half a trillion dollars worth of stimulus in 2016 to a trillion dollars of tightening in 2018. That's a $1.5 trillion dollar swing. That's roughly 2% of world GDP. Or put differently, that $1.5 trillion is roughly the size of Canada's GDP, which is the 10th largest in the world. Just as that money materialized out of nothing to buy bonds through QE, it's scheduled to evaporate, pulling that capital out of the world's system. It would be noticed if Canada just didn't show up economically all of a sudden. I expect this central bank policy shift will be noticed as well.

Along that same line, here's today's shocking note of the day, courtesy of Baird Advisors Mary Ellen Stanek: "Collectively, the Fed, European Central Bank and Bank of Japan own one-third of the global bond market." Astonishing.

Think ahead

Now that I've gone all Debby-Downer on you, what's the point of all this? Am I telling you to sell and run for the hills? Of course not.

However, an important fact of investing is that when prospective returns are high, that's when you want to be maximally aggressive. And when prospective returns are low, that's the time to get more conservative. We know when these times are (roughly) based on valuations, which have a fantastic track record of projecting long-term future returns. Valuation is a lousy short-term timing signal. But it's great at telling us what to expect over the next 7-12 years. And with current valuations ranging somewhere between "worst ever" and "only worse before the 1929 and 2000 market peaks," we know total returns over the next decade aren't going to be very good. Usually that means a significant bear market that knocks those valuations down to a more reasonable level.

The message here isn't to sell and run away. It's that prospective returns are low and risk is high, so keep risk front-of-mind as these fantastic returns continue to roll in. That's hard to do when Sector Rotation is up another 5.6% already in November, after skyrocketing 16.1% in October. But it's a necessary part of being a successful long-term investor.

At a minimum, applying this information means sticking to your long-term plan. Just this simple step will keep you ahead of most investors, who unthinkingly get more aggressive as risk increases late in a bull market. Those high returns entice them to allocate more and more to riskier stocks/strategies right up until the moment the market trap door swings open beneath them. At a minimum, keep yourself from following that path. Stick to your long-term plan and reallocate back to your baseline allocations at year-end. To be blunt, this is not the time to be increasing your long-term allocation to Sector Rotation!

If you want to be more proactive than that, the approach I've long advocated is to gradually shift money away from more aggressive strategies (such as Sector Rotation) as bull markets get over-extended, and re-allocate it to conservative strategies (like Dynamic Asset Allocation) that will hold up better in the next downturn. Full disclosure: this process stinks as you're doing it, because you're never going to get the timing perfect, which means kicking yourself month by month as the high returns continue — until the market rolls over. Then it's sweet relief. Naturally, there will come a point in the next bear market when the losses have deepened and accelerated to the point that you want to throw up — that's your cue to reverse the process and start gradually re-allocating more aggressively again. [To be clear, this entire preceding paragraph is optional — you don't have to do this to be successful.]

Always be aware of your surroundings

In closing, it's worth noting that we're working every day at SMI to figure out ways to protect your capital between now and the next market opportunity. DAA was a huge step in that direction. We continue to look for more breakthroughs along those lines. As we do, be mindful of where we are in this bull/bear market cycle. And make sure your current portfolio is such that if a major shift were to occur that you could handle it without it being devastating to your long-term financial progress.

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How TDA Changes Impact Dynamic Asset Allocation and Just-the-Basics Investors

TD Ameritrade recently announced significant changes to its lineup of no transaction fee (NTF) exchange-traded funds. These changes have implications for SMI members who follow our Dynamic Asset Allocation or Just-the-Basics strategies. None of the changes affect the official recommended funds used in the strategies, but they do impact our lists of “adequate alternatives” that some members use to avoid paying transaction fees.

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DAA — November 2017 Update

There are no changes to the DAA lineup for November. Read on for the full details.

DAA is a core portfolio strategy that is designed to help SMI readers share in some of a bull market’s gains while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time. DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results, demonstrating the power of “winning by not losing.”

The recommended categories/ETFs for November remain (in order of current momentum):

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Sector Rotation - November 2017 Update

Sector Rotation gained another 14.5% in October. It has now earned a remarkable 74% over the past year!

Sector Rotation is a high-risk/high-volatility strategy. While its peaks and valleys have been more extreme than SMI's other strategies, it has generated especially impressive long-term returns, as discussed in Sector Rotation is Risky, But Highly Rewarding.

There is no change being made to the official SR recommendation for November. Here are the details.

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Stock Upgrading - New Fund Recommendations for November 2017

Our most aggressive core strategy, Stock Upgrading is a “momentum” strategy premised on the idea that recent past performance tends to persist. The strategy has you diversify your portfolio across five stock fund “risk categories” (along with up to three bond fund categories). You then buy the funds SMI objectively determines to have the highest momentum, occasionally replacing lagging funds with those showing stronger momentum. With only monthly maintenance, Fund Upgrading has generated better long-term returns than the overall market. This article explains the changes to put in place for the coming month.
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3rd Quarter Report: Let the Good Times Roll

The financial markets continued their uninterrupted march higher throughout the third quarter, with both stocks and bonds adding healthy gains. Foreign markets were again the strongest performers, but domestic stocks also were strong across all of SMI’s risk categories.

The S&P 500 total-return index has now had 11 consecutive winning months (Nov-Sept). That’s quite rare, happening for only the second time in the past four decades. As we have noted previously, this is also just the sixth time since 1950 that more than a year has passed without at least a 5% pull-back for the S&P 500 index. This lack of volatility has been highly unusual by historical standards.

Sustained trends like this are great for SMI’s trend-following strategies, so it’s no surprise they posted excellent performance during the third quarter and sport compelling year-to-date numbers as well. While market storm clouds may be rumbling in the distance, the third quarter was a reminder that cashing out of a richly-valued market while it is still rallying can mean leaving considerable gains on the table.

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An Upgrading Overview: Easy as 1-2-3

Why Upgrade?

SMI offers two primary investing strategies for “basic” members. They are different in philosophy, the amount of attention they require, and the rate of return expected from each. Our preferred investing strategy is called Fund Upgrading, and is based on the idea that if you are willing to regularly monitor your mutual-fund holdings and replace laggards periodically, you can improve your returns. While Upgrading is relatively low-maintenance, it does require you to check your fund holdings each month and replace funds occasionally. If you don’t wish to do this yourself, a professionally-managed version of Upgrading is available.

SMI also offers an investing strategy based on index funds called Just-the-Basics (JtB). JtB requires attention only once per year. The returns expected from JtB are lower over time than what we expect (and have received) from Upgrading. JtB makes the most sense for those in 401(k) plans that lack a sufficient number of quality fund options to make successful Upgrading within the plan possible. Here are the funds and percentage allocations we recommend for our Just-the-Basics indexing strategy.

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Behind the Scenes of a Strong Year for SMI’s Strategies

We've been busily working on the November newsletter, and as part of that, I've been pulling together the quarterly "report card" that we regularly run to update members on the performance of the various SMI strategies. I don't want to steal the thunder on that piece, which will be available at the end of next week. But suffice it to say, both the third quarter and 2017 overall have been very strong for SMI's strategies.

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Is the World Getting Worse, or Better?

Perspective is an interesting thing. Many people seem to feel that the world is becoming a worse place by the day. Certainly the things that divide Americans seem more pronounced than they did a decade or two ago. And it's pretty easy to look around the world and see massive problems today that weren't on most peoples' radar 20 years ago.

But in many respects, the world is a dramatically better place today than it has been for much of history. Take the following chart, which shows the massive escape from extreme poverty for much of the world's population in recent decades.

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