Fix Your Eyes on The Prize. Innovations That Could Enable S&P500 to Triple in the Next 10 Years.

I learned a very important lesson this year even though I have been studying
the markets closely for decades. Please look at the report on the next page, that
lists a major reason for every year back to 1950, for why it did not seem to be a
good time to invest in stocks. Yet the S&P 500 is up more than 100 times in
value just from 1981 to the end of 2021 (including dividends). I wondered if I
could find a good reason to invest for every year. I could not think of any! If I
couldn’t think of any specific reasons, why did stocks rise so much over the
years?

The chart below shows that US stocks have moved in clear 16 to18-year cycles.
There are consolidation phases (marked in the tan shade) when US stocks make
little progress when commodity prices are strong. The consolidation phases for
stocks have been followed by 16 to 18-year periods of very strong growth (shown
in green). This is when commodities are in a consolidation phase.

The S&P 500 rose more than 20 times in the growth cycle after WW II and
repeated that again from 1982 to 2000. After some thought, I realized why US
stocks were so strong over these periods. The rise in the value of businesses was
driven by innovation that occurred over many years. While we were being
distracted by all the negative news about daily events in the headlines, men and
women were working at government agencies, businesses, universities, research
labs and basements to design new products and services. In 1981, few people,
including myself, even dreamed of all the innovations that came about over the 20
years that followed. These innovations increased efficiencies, improved
productivity, lowered costs and increased profits for most businesses. This is what
caused the value of companies to increase so much. Many of these changes also
lowered costs for individuals or made tasks much easier. Please see some of the
innovations that revolutionized our lives during this period below.

A most significant factor that we rarely hear about is that the pace of
change is now doubling every ten years! U.S. stocks made the transition into a
consolidation phase after the technology bubble burst in 2000. The chart on page
2 shows that U.S. stocks are once again five years into another growth phase
which began in 2017. If history repeats, U.S. stocks should rise close to 20 times
or 2,000% in value over this 16 to 18-year growth cycle. The chart below, from
RBC Technical Analyst Robert Sluymer, shows how the S&P 500 has increased
in value over previous growth periods. If people behave as they have in the past,
his forecast matches my own. He writes that the S&P 500 could rise to the 13,500
to 14,000 range by 2034. The S&P 500 closed at 3,758 today. If the S&P 500 rose
to 13,500, it would represent a gain of 360% from today’s level. Please see the
next page for the innovations that we are aware of now that could boost profits,
productivity and lower costs in the next ten years or so.

We must remember that these are the innovations we know about. There
are likely many more innovations in the pipeline that we cannot even imagine
today. While the headlines bombard us with negative news about events day after
day, history shows the headlines are a major distraction from what is going on in
the background. Politics, elections, crises, wars, terrorist attacks, changes in
interest rates, inflation, and pandemics doesn’t stop people from working to
develop inventions, innovative products and new services. This is what boosts
profits for businesses over time, which in turn ends up increasing the value of
their share price.

While the situation is always different, the one factor that is constant is human
nature. Human nature has not changed in thousands of years. This is why history
often repeats. Today, it is tempting to dwell on lower stock prices, rising inflation,
rising interest rates, the potential of a recession and the war in the Ukraine.
However, what has happened in the past implies that these are just the usual
concerns that can distract us from what really drives the value of stock prices as
we are in the midst of a powerful long-term uptrend that should last another ten
years or so. If you lived through the 1980’s and 1990’s, you will know that those
years were also filled with serious crises, issues and concerns just like today.

I want to do all that I can so that you can benefit from what is very likely to
happen in the coming years, even though there may be volatility in the short-term.
When I was training for my marathons and Ironman triathlons, I wanted to
develop discipline so I trained for hours six days a week even though I didn’t
always feel like it. Rainy, cold weather would have been a good excuse to skip
going on a long run, but that would not help me reach my goal of completing
these endurance events. One of the reasons I wanted to develop discipline was so
that I could be a better portfolio manager.

In the same way, it takes mental fortitude and discipline to focus on these
longer-term cycles and the innovation that is happening around us instead of all of
the negative news. This is what can help you to be able to benefit from what is
likely to happen to stock prices in the coming years. This is especially true when
we are going through bear markets like we are now. Markets often have to retest
the lows and have two bottoms before starting a new uptrend. If you look at the
chart below, you can see that stocks are now retesting the lows made in June.
(Chart is from WSJ.)

More Investment Advisors left the business after the 1987 Stock Market Crash
than at any time before. Many investors also threw in the towel and said they
would never invest in stocks again. Am I ever glad I stuck with it since the 1990’s
were some of the best years ever for investors and investment professionals. One
of the reasons I have not retired yet is because I do not want to miss out on the
good times that I believe are in store for those who can understand what really
drives the value of share prices. Thank you for your patience and confidence!

The chart below from Frieghtos, shows how the cost of shipping a
large container has dropped in recent months. The cost was below $2,000 a trip
before Covid and then rose to more than US$20,000! The cost has now dropped
closer to US$7,000 a trip. This cost reduction will help to lower the price of many
products, which should lower inflation as the data comes out in the months ahead.
This is just one example of how so many costs are dropping. Lower inflation
figures should reduce the need to raise interest rates much more. Any good news
on inflation could turn stock prices around on a dime when there is as much
pessimism as there is now. Have a great day my friend!