2015 Stock Market Risk & Alternative Investment Opportunity

2014 brought us another year of unbelievably low interest rates and another banner year for the stock market (the S&P 500 was up 13.69% in 2014). What will 2015 bring for our financial markets?
 
The Fed assures us that they can control inflation with a smooth and orderly rise of interest rates starting this year. The majority of economists predict strong GDP growth, fueled by lower gas prices and an improving job market. The  the talking heads on CNBC predict the current bull market, despite being a bit long in the tooth, will continue to surge ahead. 
 
Frankly, we put about as much faith in the Fed and economic / market forecasts as we do in Congress’s ability to lead this great country through effective legislation. What we do believe is that six years of near-zero short-term interest rates have artificially boosted the stock market with unforeseen (but forthcoming) longer-term consequences.
 
The Fed’s continued low interest rate stimulus has flooded the economy and consumers with cash, thereby boosting corporate earnings. Stock market investors are increasingly willing to pay more for each dollar of those earnings. The price to earnings ratio on the S&P 500 is currently a sky-high 19.67 (yikes). Worse yet, Robert Shiller’s cyclically adjusted P/E valuation is nearly 28. The last three times this adjusted P/E was this high were just prior to the 1929, 2000 and 2007 market crashes(1).

Artificially high earnings coupled with nosebleed high earnings multiples (P/E ratios) is not a great combo for value investors.  

We expect the stock market will run further into bubble territory before crashing (as it always does). While we cannot predict when that will ultimately happen, rest assure…it will.

In order to achieve superior results, an investor must find asymmetric opportunities: investments where the upside potential exceeds the downside risk. We don’t think investors putting new money into the overall stock market will achieve the returns necessary to justify the risk of meaningful capital loss over the next 5-7 years. However, we are confident mobile home park investors will achieve outsized returns relative to equities over that same period while assuming less risk (there has not been a dramatic increase in values or earnings multiples in the mobile home park industry).
 
If you’re overexposed to our overvalued stock market, we recommend taking some chips off the table and starting 2015 with a new investment allocation to low volatility, high cash-flowing assets such as real estate and more specifically, mobile home parks. 

(1)  http://www.multpl.com/shiller-pe/