Dear Financial Samurais,
I believe the market is underestimating the importance of North Korea's Kim Jong Un and South Korea's Moon Jae-In historical meeting on Friday, April 27 2018. Just several months ago, there were talks about a nuclear world war. Now, thanks to diplomatic efforts during the Winter Olympics, there are talks about a complete denuclearization of the Korean peninsula. Even Trump might meet up with Kim in the coming months.
Talk about life changing quick! Yet the US stock market did nothing on April 27 or since. Notice anything about the below snapshot from CNBC's front page this pass weekend? And you thought $300,000 wasn't an acceptable middle class income or lifestyle.
The Koreas went to war in 1950 when soldiers from the North Korean People's Army (supported by the Russians and Chinese) invaded the South. The US stepped in for the sake of upholding democracy, lost about 50,000 lives, and the armed conflict ended three years later in 1953, with the signing of an armistice agreement, but no formal peace treaty was ever signed.
Maybe my enthusiasm for the Korean meeting is clouded because my wife and I visited Seoul and the DMZ in 2015. We spoke to plenty of South Koreans who felt the artificial separation of their people was sad and unnecessary, and that they'd welcome a gradual reunification. Now that a meeting has occurred, continued progress is all but a certainty.
I can see a situation where Trump has a productive meeting with Kim by June, declares that he's brought peace on Earth with a financial aid and trade incentive package if N. Korean denukes, and the stock market grinds higher through all the doubt.
Earnings from big tech and financials have so far been good. The 10-year yield touched 3% and retreated without the stock market selling off too badly. Now we have potential geopolitical stability with valuations still down about 10%. If continued strong earnings come through from the industrials and consumer staples sector, I don't see why the stock market can't rebound in the second half of the year.
Life is about managing expectations and it's wonderful to see the expected returns for the S&P 500 take a step down.
The S&P 500 is still trading at roughly 16X P/E versus 14.5X P/E historical average, but if earnings do grow by ~18% or so, the stock market is inexpensive at currently levels. I don't expect any type of sell-off like we had in 2008-2009.
Investing in stocks is a necessary part of building wealth. I've got about 30% of my net worth in stocks despite it providing zero utility or joy in my life. Historically, stocks have returned between 7% – 10% a year.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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