FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 14, 2021
IN THIS ISSUE:
- The Biggest Stock Winners of the Last 30 Years
- Picking the Best Stocks is Extremely Difficult
- Stay Diversified & Rely On Proven Professionals
- Inflation Surged 6.8% Last Month, Most Since 1982
Overview
The vast majority of people who read my letter are investors. As such, most are at least somewhat familiar with the stock market. In following, most of my readers are aware that over any given period of time, most stocks tend to underperform their benchmarks, and only a much smaller, select group of stocks deliver the positive returns and create the wealth generated by equities over time.
The goal of most investors and professional investment advisors is to try to identify those stocks which are delivering positive returns and avoid those which are underperforming. Yet that is a challenge when the vast majority of stocks tend to underperform over time. Today we’ll look at some numbers from a recent study which I think you’ll find interesting.
I suspect you’ll be surprised to learn what a large percentage of stocks consistently underperform their benchmarks versus the tiny percentage which create all the wealth generated by equities. As current-day investors, we’ve enjoyed the longest bull market in history since the Great Recession lows in 2009, but just keep in mind that only a relative handful of stocks have generated all this wealth.
As we go along today, I’ll point out the top 20 performing stocks over the last 30 years. You’ll recognize most or all of the names, I suspect. The key is how do you find stocks like these in their early stages and then hang onto them for decades? It’s a daunting challenge.
Following that discussion, we’ll look at last Friday’s terrible inflation report which saw the Consumer Price Index soar to the highest level in almost 40 years. The Consumer Price Index surged to an annual rate of 6.8%, the highest level since November 1982. I think it’s now safe to say US inflation is clearly out of control.
Obviously, inflation of nearly 7% is not good for the economy, and consumers are already feeling the pinch in their pocketbooks. Plus, this assures the Fed will have to begin hiking short-term interest rates sooner than it wanted and raise them higher than it had planned.
There’s a lot to talk about today, so let’s get started.
The Biggest Stock Winners of the Last 30 Years
Let’s start with the obvious: The vast majority of stock market wealth is created by just a handful of stocks. Before I start throwing out numbers, what percentage of stocks would you think created the vast majority of stock market wealth, say over the last 30 years? 20%? 15%? 10%? 5%? What’s your guess? Here you go.
For perspective, the global stock markets have created an unprecedented $75.7 trillion in new wealth over the last 30 years since 1990. The world has never experienced anything like it. But the shocker is that the nearly $76 trillion in new wealth was generated by just 2.4% of all stocks. Let that sink in before I hit you with the next number.
You probably knew it was a small percentage, but I’ll bet you didn’t know it was that small. I know I didn’t. But here are the latest numbers for stock returns, both good and bad. Let’s start with the bad.
According to a recent study of the performance of more than 64,000 stocks from 1990 to 2020, the compound annual returns for over half of all stocks during that 30-year period was less than the average return for one-month US Treasury bills.
That’s correct: Over the last 30 years, 55.2% of all stocks traded on major exchanges delivered returns less than the one-month Treasury bill rate which is currently 0.03%. It’s been higher than that over the last 30 years, of course, but who would have thought half of all publicly-traded stocks would have delivered less than the return of the shortest maturity T-bill rate over the last three decades?
Yet that is indeed the latest finding of researchers at Arizona State University who recently evaluated lifetime returns for every US common stock traded on the New York and American stock exchanges and the Nasdaq since 1926.
Picking the Best Stocks is Extremely Difficult
Picking the few top performing stocks among the many thousands of underachieving ones is extremely difficult. But for those who guessed right and had the discipline to stick with those winners through bull and bear markets, the rewards have been truly remarkable. Take a look.
Over the 30 years ended 2020, the S&P 500 Index has averaged an annual return of 9.5%, while the big winners shown above it have averaged 24.2%. Obviously, the list above will change in the years to come. While the above companies may continue their winning ways, the names on the Top 20 list will change over time.
“Mean reversion” is a powerful force in the stock market, and this magnitude of outperformance by all these companies listed above is not likely to be repeated over the next decade. Plus, up-and-coming tech companies will continue to replace some on the list above going forward.
Stay Diversified & Rely On Proven Professionals
My point today is most of us are not going to find and buy such companies in their infancy and then hold them for 20-30 years. My advice is don’t even try. Instead, I continue to recommend using professional money managers with proven strategies and good long-term track records.
As I indicated last week, at Halbert Wealth Management, we have a dozen professional money managers we recommend and between them, they have nearly 20 successful strategies they offer to clients. You can look at them HERE.
We are continually looking for additional successful money managers to add to our stable, and there are usually several new manager candidates under our microscope. As always, I’ll let you know when additional managers and strategies are added to our team.
Inflation Surged 6.8% Last Month, Most Since 1982
Inflation accelerated last month at its fastest pace since 1982, the Labor Department reported Friday, thus putting pressure on the economic recovery and raising the stakes for the Federal Reserve.
The Consumer Price Index, which measures the cost of a wide-ranging basket of goods and services, rose 0.8% for the month of November and a 6.8% pace on a year-over-year basis, the fastest rate since June 1982. That’s almost 40 years!
After languishing below normal levels for most of the past decade, inflation has spiked since spring as COVID vaccinations increased and the economy reopened following last year’s government-ordered shutdowns.
Furthermore, American consumers are flush with cash and increased savings, thanks to government stimulus checks and being unable to get out and spend for much of last year. It’s the “perfect storm” for higher inflation.
The greatest increases in prices were seen in gasoline, up 6.1%; shelter, up 0.5%; used cars and trucks, up 2.5% or more; new vehicles, up 1.1%; rents up 0.4%; and food, up 0.7%. Meat, poultry, fish and eggs were up by 0.9%, while pork prices rose especially sharply, up 2.2%.
For consumers under the age of 40, the recent run-up in prices represents the most severe bout of inflation in their lifetimes. The last time Americans saw such persistent price increases was in the 1970s, when US oil supplies were disrupted, initially during an embargo by Middle Eastern producers.
Inflation leaped from below 3% in 1972 to over 13% in 1979, prompting the Federal Reserve to ratchet up interest rates to as high as 20%, which caused a severe recession. By 1982, inflation had fallen back into the single digits, but the experience left many policymakers scarred and shaped monetary policy for decades.
The question is, when will we see the end of this round of rising inflation? Could the latest spike to a 6.8% annual rate be the peak? That’s impossible to say. While most forecasters believe the latest powerful spike will peak soon and inflation will be lower this time next year, no one knows for sure.
It’s true that energy prices have come down some in the last few weeks, with crude oil prices down 12-14% off their November highs. But as we all know, energy prices are very volatile, and it would be unwise to assume they have peaked for this cycle. The bottom line is, we just don’t know.
Guess what? The Chairman of the Federal Reserve made a rare admission last week: He doesn’t know either. In fact, he formally withdrew a term he has used repeatedly over the last year to assure us that this spike in inflation is only temporary.
I’ll have more to say about that in this column on Thursday. If you don’t subscribe to my Thursday column, Between The Lines, you should. It’s free and I often write about topics and themes I don’t write about in Forecasts & Trends. You should sign up here today.
Very best regards,
Gary D. Halbert
SPECIAL ARTICLES
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US Inflation Hit 39-Year High in November
Gary’s Between the Lines column: Crazy Home Prices Rose Almost 20% Last Year, Now What?
