Pen People Mar 2018

midterm election year , when we often see the worst pullback in the market
of the four-year presidential cycle. History has shown that short-term declines
in midterm election years have averaged nearly 17 percent since
1950, so any significant pullback may be a nice buying opportunity. And,
for those who can hang on for the ride, the subsequent 12-month gains
(2019) from the lows could be impressive with average historical returns of
32 percent.
Assuming we get through the recent correction in stock prices and the
bull market resumes its upward trend, I certainly hope the scenario laid
out by Grantham comes true (He sees potential for another 30 percent rise
in the broad market over the next couple of years). But, as I have written
about on many occasions, it's impossible to predict the catalyst for the bursting
of a bubble and it's also impossible to predict the duration of any bull
market (bubble or not), so there is no denying that risks are elevated at this
point. If the upward trend persists and prices push further into nosebleed
territory, my intention will be to reduce stock exposure significantly at that
time. We have no way of knowing if we'll experience a crash following such
a steep final leg higher (if we get it) or simply a garden-variety bear market
(decline of 20 percent or so), but I think the probability of a pretty severe
decline will be high.
I checked in with local Registered Investment Advisor and Chartered Financial
Analyst Joe Gagnon, to get his take on the current market and the
economy. Why Joe? Well, I can count on one hand the advisors and money
managers I know of who predicted both the Dot-Com Bubble and subsequent
crash in 2000-2002 and the Housing Bubble and collapse of 2008-
2009, and Joe is one of them. I heard Gagnon warn of the risks of both of
these bubbles before they popped. Gagnon has more than 30 years of experience
navigating the markets and is a longtime Palos Verdes Estates resident.
Revenue growth no longer enough
Chaussee: What’s your outlook for the markets?
Gagnon: Given elevated valuations and high profit margins, total returns
for stocks will be well below average, likely in the 0 to 5 percent range annualized
over the coming 5 to 10 years.
Chaussee: Do you anticipate a recession and/or bear market in the next
year or two?
Gagnon: I don’t see a recession on the horizon because the corporate tax
cut will likely have a positive impact on the economy. But, if we get through
the current drawdown and the melt-up in stocks continues, we could very
well follow that at some point with a bear-market correction of greater than
20 percent.
Chaussee: Are there any places left to find value in the stock market?
What would you avoid?
Gagnon: There is some value left in the energy and retail sectors. I'd
avoid the hot momentum stocks, in particular, Amazon, Netflix, Tesla, etc.
where valuations are surreal and expectations are very high.
Chaussee: What should investors do if they are concerned?
Gagnon: As the market trends higher, raising cash and being patient is
the best bet.
Chaussee: What's your take on the bond market?
Gagnon: The bond market is overvalued and has been for years. Interest
rates have stayed low much longer than most investors have expected. The
economy, due to high debt levels, is very sensitive to interest rate changes.
So, if rates were to rise too quickly it likely would cause economic growth
to stall and rates would fall back.
Chaussee: How about real estate?
Gagnon: Because of low interest rates, real estate values in some markets
have hit all-time highs. There are pockets of overvaluation, but real estate
is not as crazy as in the last financial crisis. It remains to be seen how the
change in tax law will affect real estate in the high tax states like California.
On the margin it is negative. Certainly, if rates were to rise, real estate could
come under substantial pressure.
Chaussee: What similarities do you see between the current market and
the exuberance of the Dot-Com Bubble in 2000 and the Multi-Asset Bubble
that burst in 2008?
Gagnon: The current high valuations of the large momentum stocks certainly
are similar to the Dot-Com Bubble and the Nifty-Fifty Bubble of the
early 1970s. The Amazon phenomenon has become so great that it seems
every day the company disrupts another industry. Indeed, Amazon has disrupted
many businesses already, but with a $700 billion market value, the
company will, at some point, have to deliver profits sufficient to justify that
valuation. Currently the market only cares about revenue growth for these
companies. It's mindful to remember that Microsoft's revenue per share
has grown over five times in the last seventeen years since the Dot-Com
Bubble burst, yet it was only in the last year that Microsoft's stock price
surpassed its 2000 high.
Chaussee: Any comment on Bitcoin?
Gagnon: That is one thing that is unique to this market -- the Bitcoin
Bubble – and it looks like it may have just popped. It is certainly very frothy
and it’s hard to believe that world governments are going to give up control
of their monetary policies to cryptocurrencies.
Peninsula Real Estate holding steady
Stocks aren’t the only asset class pushing back into bubble territory – the
U.S. housing market, while lacking some of the euphoria present in 2006,
still shows prices that are higher, relative to household income, than any
other time in history. So, perhaps the Housing Bubble of 2006 makes today’s
prices seem relatively tame, since we don’t have the same level of enthusiasm
in the market, but in my humble opinion, real estate appears to be on
the cusp of another bubble.
I touched base with some real estate professionals to weigh in on the local
market and trends on the Peninsula. Here’s what they had to say.
Heidi Mackenbach is part of the Fountain-Mackenbach team at Re/Max Estate
Properties. She is a Realtor and Senior Sales Associate with 28 years of experience.
Chaussee: Give me your take of the current market on the Peninsula?
Mackenbach: We’ve been on an upward trend over the past seven years.
Going forward, I still see real estate on the Peninsula holding strong. You
could argue we have plateaued in some areas, but it’s very difficult to generalize
about prices in Palos Verdes. Palos Verdes is very neighborhood or
area-specific.
Chaussee: Which areas have been the strongest in the past year or so?
Mackenbach: Palos Verdes Estates, for sure, has been the strongest.
Leading the way would be Lunada Bay, followed closely by Malaga Cove.
And, any property that has a feature that is highly sought after – a big flat
lot or an outstanding view, for example. We have seen so many buyers and
such demand for these types of properties that some listing prices have
been driven from $2.6 million to perhaps $3.4 million.
Chaussee: Has the demand come from move-up buyers or has it been
more from out-of-state or out-of-country buyers?
Mackenbach: The demand has mainly come from move-up buyers with
families moving in from the Beach Cities or perhaps the West Side.
Chaussee: What do you think the percentage appreciation was in 2017
for 90274 and 90275?
Mackenbach: In Lunada Bay we saw appreciation of perhaps 10 percent
last year. In Valmonte, appreciation was around 8 percent and Malaga Cove
was up around 10 percent. But other areas, in the same zip code, like Rolling
Hills, was flat. Rolling Hills is a different market and in some cases I think
there was no appreciation at all last year. In 90275, most areas of Rancho
Palos Verdes, I would think appreciation averaged 5 percent.
Chaussee: Would you define the market as still a “seller’s market?” Are
homes moving pretty fast?
Mackenbach: Yes, if priced reasonably they are selling within 30 days.
If the price is set too high or there is some feature that is disagreeable, then
it can take over 90 days to sell and that may involve a price cut. For desirable
homes that are priced correctly, we are still seeing multiple offers. We
aren’t seeing the same level of high activity we saw last spring (March-
May), but for good properties we can see several strong bids. One thing that
will keep demand high is that inventory is very low and it appears to be
trending down too.
Chaussee: What do you think will be the average price appreciation over
the coming 5 to 10 years?
Mackenbach: I think 3 percent or so averaged annually. I don’t see a
heated market from here that would push prices up much more. At the
same time, I don’t see a potential price drop on the horizon either. We have
good job growth,low inventory and plenty of demand. Also, I think the
bump up in interest rates hasn’t hurt the market much because it was anticipated.
Chaussee: Are there any areas or neighborhoods that have been over-
18 Peninsula • March 2018