Noted investment manager Bill Miller believes that the current bull market in stocks is far from over and that investors are still unduly rattled by the 2008 financial crisis. "Fears of recession or of a bear market have been endemic since this bull market began," Miller writes in his 1Q 2019 Market Letter to clients of his firm, Miller Value Partners. The emphasis is his.
"The financial crisis was so financially and emotionally devastating for so many that it left the typical investor, whether individual or institutional, risk and volatility phobic, determined to avoid a repeat of that catastrophe and subsequently doomed to leave a lot of money on the table in the search for safety. This is similar to the impact of the Great Depression of the 1930s on the public," he adds. The table below summarizes the key reasons why Miller is bullish now.
Why Bill Miller Is Bullish
- "The economy is in a long expansion which shows no signs of ending."
- "The Fed is accommodative and has indicated it is in no hurry to raise rates."
- "Inflation is low, interest rates provide no significant competition to stocks."
- "There is plenty of room for dividends to grow faster than earnings."
- Post-financial crisis fears led to "perceived risk" that exceeds "real risk."
- Equity risk premiums are high relative to history, making stocks attractive.
- "Excess returns are still available due to the long-standing desire for safety."
- "The path of least resistance for stocks remains higher."
Source: Bill Miller, 1Q 2019 Market Letter to clients of Miller Value Partners
Bill Miller's Track Record
Prior to founding his own firm, Miller had a long career as a fund manager with Legg Mason. During this time, he outperformed the S&P 500 Index (SPX) for a record 15 consecutive years, from 1991 through 2005, earning him widespread recognition as the greatest mutual fund manager of that era, per "InstitutionalInvestor.com."
However, Miller later bet heavily on financial stocks that cratered during the financial crisis, sending his fund, the Legg Mason Capital Management Value Trust, plummeting by two-thirds in the process. Investors fled in droves. A sharp recovery by the fund in 2009 and 2010 went largely unnoticed by the financial press, Institutional Investor adds.
In his letter, Miller says that he adheres to a "long-term, patient, contrarian (for the most part), value-driven philosophy." He states that, from the previous bear market low on March 9, 2009, through the close on March 31, 2019, "a representative Opportunity Equity account, net of fees" at his firm has beaten the S&P 500 by more than 450 basis points annually.
Discounting Economic Forecasts
"I agree with the remarks of Peter Lynch, Fidelity's great portfolio manager, who said he did not spend 15 minutes a year trying to forecast the economy. He said he believed more money was lost worrying about or preparing for recessions than was lost in the recessions themselves...Trying to surf the market according to the flow of macro data added no value but hurt performance...Much better to focus on what is happening now and avoid trying to forecast the unknowable."
Positives Happening Now
Miller notes that GDP, corporate profits, profit margins, cash flows, dividends, and household net worth are at all-time highs, while "unemployment is at a 50-year low, initial claims for unemployment are at the lowest level relative to population in history...consumer balance sheets are fine, the savings rate at 6% is solid." He observes, "Usually when the economic data is that positive, stocks are at an all-time high, but they are not (yet)."
Some believe that the U.S. economy is due for a reversal simply given that it has been expanding for nearly 10 years, since June 2009. Miller counters that "Australia is in its 28th year of continuous expansion."
Stocks Beat Bonds
"Bonds [are] trading at 40x a cash stream that will not grow while stocks trade at 17x earnings and those should grow at about 5%, or a bit more, long term. Dividends for the S&P 500 grew 9.9% for the four quarters ending March 31. There is plenty of room for dividends to grow faster than earnings since the current payout ratio is 35.5% compared to 52% on average since 2016. Buybacks are at record levels."
While Miller sees attractive equity valuations, a recent analysis by Goldman Sachs finds that seven of nine metrics are near historic highs. Others are concerned that both household debt and corporate debt have reached unsustainable levels.