Ellis Smith presents a cautionary look at the markets

Ellis Smith, Portfolio Manager at Carmel Capital Partners, presented the membership of The Executives’ with an interesting analysis of where the markets are headed through and past the pandemic.  His presentation, drawing from Jim Sloan’s article A ‘Little Ice Age’ Is Upon Us: Take Note And Be Ready To Change Your Thinking, left the membership with several important take-aways:

  • Even before the appearance of COVID-19 a “little ice age” was sneaking up on the market marked by a painful slow-motion drop in valuations.
  • Stocks had 20-plus PE ratios almost every year for two decades, actually dragging the long-term average PE up by almost 15%.
  • The coronavirus triggered a crisis which will hasten the transition to a new era in which debt problems will be exposed and stock valuation will enter a glacial decline.
  • The present methods and assumptions will cease to work and old virtues and standards of analysis will be rediscovered and restated.
  • Everything will change, not always for the worse. Prudent behavior will seem more reasonable. Virtue will rally, integrity and wisdom over genius and cleverness.
  • “When the facts change, I change my mind. What do you do, sir?” – John Maynard Keynes
  • “I repeat my warning that paradigm shifts are normal in our system. The past, no matter how instructive, is always the past.” – Peter Bernstein, Foreword to Jeremy Siegel’s Stocks For The Long Run
  • “It’s only when the tide goes out that you learn who has been swimming naked. Interpretation: Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed.” – Warren Buffett

For a more in-depth read you can find the article here.