Category Archives: Stocks


BREXIT Aftermath: Where to Look for Returns & What to Avoid Now

  • The U.S. and Europe are overvalued, especially seeing the current political situation and economic fragility.
  • What’s about to hit Europe and the U.S. already hit emerging markets in 2015. There are opportunities in emerging markets now, but where?
  • Bonds seem the riskiest asset of all with no yield and huge potential downside.


After last week’s BREXIT vote the markets have been in a free fall with a slight recovery yesterday. But savvy investors have been expecting this and it has been a recurring theme at Investiv Daily that stocks are overvalued. In such an overvalued environment it is normal that inflated asset prices take a beating at any sign of future uncertainty.

As one’s misfortune is another’s fortune, this article is going to elaborate on what to look for and what to avoid in order to limit risks and maximize returns.

The U.S. Stock Market

The U.S. stock market is fully valued and therefore the decline should not have come as a surprise. The S&P 500 has been moving sideways for the last year and a half and many are expecting a recession. In such an environment the risks are high and the potential returns very low.

figure 1 pe earnings
Figure 1: S&P 500 PE ratio and earnings. Source: Multpl.

With a PE ratio of 24 and declining earnings, the only way for investors to realize capital gains by investing in the S&P 500 would be through the formation of an asset bubble. With the current political turmoil, slower U.S. productivity, lower employment participation and strong dollar, this seems like a very unlikely scenario.

On the other hand, those factors might start a recession that could easily lower the S&P 500 to the average historical PE ratio of 15 which would cause a 1,300 point, or 35% drop. Therefore, the conclusion is that the S&P 500 carries a lot of risks with limited upside.

Emerging Markets

Emerging markets were the thing to avoid in 2015, but they still possess long term factors that should make them the long term investment winners, especially if bought at these depressed prices. Let us focus on Brazil as an example.

Brazil was hit by various corruption scandals and by the deepest recession in the last two decades. But, Brazil is still a young country rich in natural resources and on the road to becoming part of the developed world, minor setbacks are normal and should be used as an investment opportunity.

figure 2 brazil GDP
Figure 2: Brazil’s GDP in billions of US dollars. Source: Trading Economics.

Brazil’s GDP grew from $1,107 billion to $2,346 billion in ten years which still represents a yearly average growth of 7.7%. As the market has already factored in the chance of a Brazil bankruptcy, the risks and rewards of investing there are opposite from what they are in the U.S., as there is no risk of a U.S. bankruptcy.

Brazil’s current CAPE (Cyclically adjusted 10 year average price earnings ratio) is currently 3 times undervalued at 8.2, while the S&P 500 has a CAPE ratio of 24.6. The undervaluation is probably the reason why Brazilian stocks have behaved very well in the last few days. The Brazilian stock index is still in positive territory for the month and year to date. On top of the relative stability, U.S. investors could also gain from currency benefits as the oversold real is slowly returning to its real exchange value toward the dollar.

figure 3 usd brl
Figure 3: USD vs BRL in the last year. Source: XE.

To conclude, Brazil represents a young, resource rich country where it seems that all that could go wrong did go wrong last year. More positive news than negative news should now be expected. On top of that, it is one of the most undervalued markets in the world.


The situation in Europe is similar if not worse than the one in the U.S. To put it simply, the markets are in an asset bubble as the European Central Bank has been issuing huge amounts of liquidity with the hope of faster economic growth and some inflation. It succeeded for a while but the BREXIT issue will for sure have a negative impact on current economic growth when coupled with the overvalued markets, the risks outweigh the rewards.

The average PE ratio in Italy is 31.5, Netherlands 28.5, United Kingdom 35.4 and Germany 19. There is also the euro issue where any political turmoil could weaken the euro and lower investment returns for U.S. investors.

Europe should be avoided until asset prices reflect the real state of the economy and the political situation, thus far below current prices, at least 50%.

Gold and Bonds

It is uncommon to put gold and bonds in the same basket but as they both have practically no yield with negative interest rates on the most secure government bonds, it seems the right choice.

Gold is currently at its year high as investors look for safety. The problem with gold is that it has no yield and most investors come too late to the party as gold primarily appreciates at maximum turmoil as it has done in the past few days.

figure 4 gold prices
Figure 4: Gold prices in the last year. Source: Bloomberg.

If political turmoil persists and inflation arrives due to the high liquidity, gold might be the winner, but any signs of stabilization would negatively affect gold. It can be concluded that gold represents a good hedge and could be a part of a well-diversified portfolio. Investors that seek a riskier investment than gold itself could go for gold mining stocks that offer a dividend yield and potential growth, though gold mining stocks also come with much more volatility.

As for government bonds, the risks seem to outweigh the rewards. Yes, it is possible to make capital gains if interest rates further decline, but this defies logic as there is no point in holding negative yielding bonds. On the other hand, if yields increase bonds could fall tremendously as a 100% increase in bond yields should consequently lower bond prices by 50%. Therefore, the current situation with bonds isn’t what’s typically assumed about bonds—low risk with high rewards—as right now they are high risk with low rewards.


At this point, after a 7-year bull market and high liquidity provided by central banks, investors should be wary of being overweight in the same things that were good 7 years ago. Many analysts have forgotten how to analyze risk as we have not seen a bear market since 2009, but this is exactly the time when one should look at risks before rewards. High asset prices and low yields mean that investors do not see much risk and are willing to pay hefty prices, but this is exactly the kind of situation that can bring lots of investment pains.

Any signs of recession, the continuation of the decline in corporate earnings, and a shift from the current investor’s perception that central banks are still able to save the markets with additional intervention, could easily send the stock market down by 30%. Assess your risks, estimate the rewards, and position your portfolio accordingly.


How to Prepare Your Portfolio For The Next Recession or Stock Market Crash

  • The risks of a slowdown are higher than the upside.
  • Fundamental trends are negative in advanced economies while emerging markets show higher growth rates and are cheaper.
  • It is important to create a diversified portfolio with uncorrelated assets.


In an environment where it seems maximum potential for the U.S. economy has been reached, the St. Louis FED chief, James Bullard, has said in his most recent report that he favors only one interest rate increase through 2018, which would at best keep things stable. His view is further supported by the fact that the unemployment rate is sitting at below 5%, and the Personal Consumption Expenditures PCE inflation—measured by the Dallas FED—is at 1.84%, both of which signal that the economy has reached its maximum potential.

1 figure trimmed inflation
Figure 1: Trimmed mean PCE inflation. Source: FRED.

The scary part of the report is where Mr. Bullard describes how forecasts are made based on the current situation, which will most definitely change. What is difficult to predict is the direction of the change therefore, forecasts are bound to be incorrect and under the influence of various risks like a return to the normal Phillips curve influence where low unemployment triggers inflation, or a recession even if no current data indicates the possibility of one. Thus only an extremely positive scenario would trigger interest rate increases if fundamentals like inflation or productivity stay stable.

2 figure fed stlouis
Figure 2: St. Louis FED’s U.S. macroeconomic outlook. Source: St. Louis FED.

The conclusion is that practically anything can happen, and the FED has absolutely no idea as to where the economy will be in a year or two. Even FED Chairwoman Yellen admits that the 2013 expected interest rates of 4% for 2016 were too high and that an aging society and a slump in productivity growth will keep the subdued economic indicators persistent.

In such an uncertain environment, an investor should look at the best ways to protect his downside and maximize his upside.

Investment Ideas

Let us start with bonds where interest rates have been declining since the start of this century.


3 figure bonds
Figure 3: 10-year government bonds yields. Source: Wall Street Journal.

As bond prices are inverse to bond yields, any increase in yields would precipitate bond prices, thus bonds are currently low yield and high risk. Usually considered safe havens in recession times, bonds currently do not provide such protection as it is better to keep cash than bonds with negative interest rates. There is the option of further bond price increases, but that is a highly unlikely scenario as bond yields are at historical lows.

The Stock Market

The S&P 500 is still holding well, but does not manage to break the previous highs despite having come close several times.

4 figure s&P 500
Figure 4: S&P 500 in the last 12 months. Source: Bloomberg.

The S&P 500 dividend yield is 2.12% which might look tempting when compared to the extremely low bond yields, but it is meagre when compared to the historical mean of 4.39%. A return to the mean would result in a drop of 50% or more of the S&P 500 index. The conclusion here is the same as with bonds: High risk, low returns.

But there is an option with stocks that should limit the downside. Dividend stocks that will not see their cash flows affected by a slowing down in the economy are always assets toward which investors run when trouble comes. Examples can be found in telecommunication, consumer staples and healthcare.

Emerging Markets

If the reason for economic stagnation in the developed world is an aging society, slow productivity growth and emerging markets competition, a contrarian thesis would be to invest into emerging markets.

Emerging markets have a relatively young population and are currently shunned by investors as too risky amidst a commodity price slump. But no matter the current issues, the World Bank expects emerging markets and developing economies to grow at rates north of 4% in the long term, while advanced economies are expected to grow below 2%.

Currently, advanced economies are preferred by investors as they regard them as secure, but long term structural trends are strong in place even if we do not choose to see them. What China has done in the last 15 years could be the same as India is about to do. Brazil will probably also return to growth someday.

The following figure will show that the current developed world impression of asset security is mostly funded by debt which is unsustainable in the long term.

figure 5 investment position
Figure 5: U.S. net international investment position. Source: Bureau of Economic Analysis.

On top of that, emerging markets are much cheaper than developed ones according to the Cyclically Adjusted Price Earnings (CAPE) ratio which takes into account earnings from the past 10 years.

figure 6 global cape
Figure 6: Global CAPE map. Source: Star Capital.

For long term investors, the less risky option might be to dig for good investments in emerging markets with positive demographics and a strong growth outlook. Currently those investments are out of favor, but this is exactly the environment where investments give the best returns.


Gold is a doomsday investment, it protects you against inflation and is the metal that surges in difficult times. Typically as the economy does well, stocks grow and gold declines because gold has no yield. The opposite happens in turmoil.

7 figure guardian precious metals
Figure 7: Gold and stocks cycle. Source: Guardian Precious Metals.

You can invest in gold by buying it physically, through ETFs or by buying gold miner stocks.


As always, good diversification should provide sufficient downside protection but a portfolio has to be diversified with uncorrelated assets.

If you have Ford in your portfolio and then you add some Caterpillar, that is not real diversification. Gold, emerging markets, cash, and quality stocks should enable a portfolio to weather economic hardships.

Don’t forget that after every recession comes a recovery, so be ready to increase your exposure to stocks when assets are cheap, even if everyone will be thinking that there is no tomorrow.


Dividend Aristocrats: Should You Buy?

  • Stock picking amid dividend aristocrats should give even better results.
  • Dividend aristocrats come from recession-proof industry sectors.
  • PE ratios vary from 11 to 155 and dividend yields from 0.4% to 6.5%.


A company receives the title of ‘dividend aristocrat’ when it has continuously increased its dividend for the last 25 or more years. This means that the company manages to go through recessions and market shocks with a growing, healthy cash flow that enables constant dividend increases.

This is what makes those companies so attractive for investors because lots of companies can show positive improvements in times of economic prosperity like the ones we have been enjoying for the last 7 years, but only few are able to do that consistently through economic cycles.

Any company that has increased its dividend in the last 25 years is a great company and therefore has to be analyzed for portfolio inclusion. This article is going to elaborate on how important dividend aristocrats are for a portfolio and what else is important when assessing such wonderful companies.

Current Situation

In an environment of low or no yields on savings, dividends have become increasingly important for investors depending on a constant stream of income. Retirees are an  example. On top of the healthy yields dividend aristocrats offer, the possibility of future yield increases.

The best way to have a look at how dividend aristocrats are doing is by analyzing the S&P 500 Dividend Aristocrats ETF (NOBL) which consists of 5 companies. Since its inception in October 2013 it has outperformed the S&P 500 by 9 percentage points, and this is excluding dividends.

figure 1 nobl vs sandp
Figure 1: NOBL versus the S&P 500 excluding dividends. Source: Yahoo Finance.

It is interesting how even with outperforming the S&P 500 and constant dividend increases the NOBL ETF has a lower PE ratio than the S&P 500, at 20.33 versus 23.94 respectively. As the NOBL was only incepted in 2013, it is not a representative look at the S&P 500 dividend aristocrat index, but will let us know if there really is something in these dividend aristocrats.

figure 2 S&P 5000 dividends
Figure 2: S&P 500 Dividend Aristocrats Index versus S&P 500. Source: S&P Indices.

As the dividend aristocrats have beaten the S&P 500 both in the short and long term, we should all run and buy them, right? Well, not so fast. Something to assess before buying are costs and valuations.


Even if just buying all the dividend aristocrats would probably not be such a bad idea, let us first take a look at valuations in order to potentially reach even better results.

We already mentioned that the PE ratio is lower than the S&P 500 average, but in an environment of 50 stocks, much more can be found. A PE ratio above 20 is still risky in historical terms as it implies an earnings yield of 5%, which is of course better than the S&P 500 4.16% but still below historical averages.

The other issue is costs: the NOBL ETF expense ratio is 0.35% which is still something that would consistently lower your returns in the long term for a service that you can perhaps even do better by yourself as all the dividend aristocrats are publicly available. On top of that, the NOBL ETF distribution yield is 1.56% while the S&P dividend aristocrats index dividend yield is 2.54%, which implies a higher expense ratio, but this is not the focus of this article.

TickerCompanyPE RatioDividend Yield
MKCMcCormick & Company, Incorporated33.11.70%
SYYSysco Corporation36.12.50%
EDConsolidated Edison, Inc.20.23.40%
BCRCR Bard Inc.1520.40%
CLXThe Clorox Company25.92.30%
CINFCincinnati Financial Corp.16.52.70%
TAT&T, Inc.17.34.70%
PNRPentair plcN/A2.10%
ADMArcher-Daniels-Midland Company16.32.70%
MDTMedtronic plc49.51.80%
LEGLeggett & Platt, Incorporated20.92.60%
CTASCintas Corporation24.11.10%
KMBKimberly-Clark Corporation44.42.70%
DOVDover Corporation19.12.40%
HCPHCP, Inc.N/A6.50%
BDXBecton, Dickinson and Company44.31.60%
BF-BBrown-Forman Corporation18.51.40%
XOMExxon Mobil Corporation29.23.20%
CLColgate-Palmolive Co.47.12.10%
SPGIS&P Global, Inc.25.371.35%
WMTWal-Mart Stores Inc.15.72.80%
WBAWalgreens Boots Alliance, Inc.27.61.70%
LOWLowe's Companies, Inc.26.21.40%
PGThe Procter & Gamble Company27.13.20%
ECLEcolab Inc.35.61.20%
JNJJohnson & Johnson21.12.60%
NUENucor Corporation44.73.00%
ITWIllinois Tool Works Inc.20.42.00%
PEPPepsico, Inc.29.52.80%
AFLAflac Incorporated11.32.40%
SWKStanley Black & Decker, Inc.18.32.00%
KOThe Coca-Cola Company27.13.00%
MMM3M Company21.72.50%
GPCGenuine Parts Company20.92.60%
CVXChevron Corporation 146.94.20%
VFCV.F. Corporation22.72.30%
ADPAutomatic Data Processing, Inc.27.62.40%
ABBVAbbVie Inc.183.60%
MCDMcDonald's Corp.23.52.90%
APDAir Products and Chemicals, Inc.222.30%
GWWW.W. Grainger, Inc.19.32.10%
SHWThe Sherwin-Williams Company25.31.10%
PPGPPG Industries, Inc.20.41.40%
EMREmerson Electric Co.17.83.60%
HRLHormel Foods Corporation24.11.60%
TROWT. Rowe Price Group, Inc.15.43.00%
CAHCardinal Health, Inc.182.10%
ABTAbbott Laboratories26.32.70%
BENFranklin Resources, Inc.12.12.00%
TGTTarget Corp.12.83.30%
Table 1: Dividend aristocrats by PE ratio and yield. Source: Morningstar.

The above table represents all the dividend aristocrats from the S&P 1500 and shows what a variegate group that is with PE ratios going from 11.3 to 152 and dividend yields from 0.4% to 6.5%. As according to the father of defensive investing Benjamin Graham and his book Security Analysis, a defensive investor should not buy stocks with a PE ratio higher than 15. The above list provides a possibility to choose for yourself and not pay unnecessary fees.

Sector Breakdown

By buying dividend aristocrats yourself you can select the best sector exposure in relation to your existing portfolio.

figure 3 sector exposure
Figure 3: S&P dividend aristocrats sector breakdown. Source: S&P Indices.

It is interesting to note that the biggest chunk of dividend aristocrats is made by recession-proof sectors like consumer staples and discretionary, health care, energy, utilities and telecommunication services. An astute investor could pick only the sectors he expects not to be severely hit by possible future economic turmoil.


The purpose of this article was to indicate that dividend aristocrats usually beat the S&P 500 and that they are also currently cheaper. On top of that, an investor can pick himself the best aristocrats for his portfolio or just wait for the complete market to fall to more normal historical levels and only then be more overweight in stocks.

The above list of companies represents relatively good companies which should make part of a well-diversified portfolio, but only for the right valuation.


If Stocks Are Risky, What About Bonds?

  • Yields should be the main factor when choosing whether to invest in bonds or stocks.
  • As yields cannot go much lower, bonds become risky too.
  • Historically any significant increase in bond yields brings to negative returns.


It is almost common knowledge that in the long term stocks outperform bonds as bonds are less risky and therefore have lower yields. But if we look at the question from the title of this article from a long term perspective where stocks always outperform, then there is no risk in investing in stocks as eventually you will be rewarded with higher returns. And this is exactly the current market’s perception on the stocks vs. bonds issue.

figure 1 bonds earnings dividends
Figure 1: Dividend yields, bond yields and S&P 500 earnings yield since 1927. Source: Federal Reserve, Multpl, NYU.

Historically the corporate earnings yield was the highest, except for the high inflation period in the 1980s and the dotcom bubble in the late 1990s, early 2000s. We could say that things are finally returning to normal as corporate earnings are higher than bond yields and therefore the logic that stocks will outperform bonds in the long run is correct at the moment.

Stocks did not outperform bonds in times when the earnings yield was lower than the bond yield. 2011 was the first time that bonds outperformed stocks over a 30-year period which is logical as in 1981 bond yields were higher than stock yields. The same has happened since the beginning of this century.

2 figure stock vs bods 21 century
Figure 2: Stocks vs bonds since 2000. Source: Wall Street Journal.

As bond yields were almost double corporate earnings in 2000, bonds smoothly outperformed stocks. We can easily conclude that yields are the main factor in the return puzzle and that investors can expect their returns to be perfectly correlated to the underlying earnings when investing in stocks or to the yields when investing in bonds.


Bonds are considered much less risky than stocks and if we look at the above figure that is clear as bonds did not experience the swings stocks did. But do not get fooled by bonds and their stable growth as most of the above returns were influenced by declining interest rates. As interest rates decline bond returns increase. The opposite happens if interest rates increase.

3 figure bond yields and returns
Figure 3: Bond returns versus changes in yields from 1927. Source: NYU and author’s calculation.

The almost perfect correlation in the above figure shows that no investment should be made based on general assumptions like the ones that bonds are less risky and that stocks always outperform in the long term. The first thing to look at is the yield of the potential investment, be it stocks or bonds, and then the risk.

The current S&P 500 earnings yield is 4.16% and the 10-year treasury bond yield is 1.62%. By looking at the risk side of the puzzle, it is clear that we are in an asset bubble, as both yields on bonds and stocks are historically low (figure 1). Bond yields have never been below 2% and stock yields are far below the historical mean of 7.42%. The main risk for both assets lies in interest rate increases. As there is no historical precedent to the current low yields and monetary policies, we can only assume an eventual return to normalcy.

As figure 3 shows, any increase in bond yields of 25% from the current yield results in negative returns from 5% to 15% for bonds. At current levels a yield increase of 25% would bring bond yields from 1.61% to just 2.01% and have a negative effect on bond returns. We can only imagine what a 100% bond yield increase would do to bond returns as we have no similar data in the last 90 years to analyze such a situation. A 100% increase in bond yields would bring the current yield to only 3.2% which is still historically very low.

The same can be expected for stock returns because with bond yields going higher, expected stock yields will also be higher and therefore stocks would have to go down.


No one knows what will happen in the future and all that we can make are assumptions based on analysis of historical data. Those assumptions tell us that the risks to an investor by being invested in stocks or bonds are high as both asset classes are in a bubble. If interest rates increase, and eventually they will as that is the goal of every central bank, are you willing to risk 20% of your investment for a yearly 1.6% yield from bonds or 40% for a 4% yield from stocks.

The usual investment tradeoff between bonds and stocks of being overweight the undervalued one and change accordingly might be a good solution. On the other hand, the recent negative yield on the German 10-year note shows how crazy the market can get so that nothing should be excluded but we should properly assess risks.

What Are The Options? 

One option that is usually blasphemy for investors but has to be considered is cash. As most asset classes are overvalued, cash might be a good option to weather the turmoil and give liquidity to buy stocks or bonds at lower prices.

Another option is to find stocks that will outperform the market and perform well in an environment with higher interest rates and inflation. Commodities that are uncorrelated to the economy can be a good protection, as well as utilities with low debt.

All of the above is easy to write about but very difficult to correctly time, but the purpose of this article was not to give exact forecasts and advice, but rather a mere overview of what can happen.