Investing For The Next Decade

The Wall Street chickens are coming home to roost. What do I mean?

The stock market is bound for a hard landing after flying high for the past two years – fueled by stimulus checks. Even as we’re just now starting to deal with the effects of inflation, investors will start to suffer the ramifications of an inflated stock market.

How overvalued is the stock market?

The price to earnings (P/E) ratio of the S&P 500 has historically been a reliable measure of whether the stock market is overvalued. A high P/E ratio is a sign stocks are trading well beyond rational economic metrics. Historically, the average P/E for the S&P 500 is around 16. Over the past two years, the P/E ratio of the S&P 500 has hovered around 30 – nearly double the historical average.

Although some of the Wall Street chickens have already come home to roost (the Dow is down nearly 16% year-to-date), some analysts believe there is still more pain on the road ahead. At least one analyst believes it could last as long as a decade.

“This Could Be a Lost Decade for Stocks” –wsj.com

According to Spencer Jakab of the Wall Street Journal, the prognosis for U.S. stocks is not good – even predicting a lost decade for stocks. According to Jakab, “U.S. shares could go nowhere for a while based on long-term valuations, or they could get it over with and crash.” Neither scenario is good for stocks.

So, should a lost decade for stocks mean a lost decade for investing? No, because opportunities will always arise no matter the economic environment.

For example, in the aftermath of the Great Recession, with many people downsizing because of foreclosure, job loss, or income reduction, demand for affordable housing boomed. It’s been more than a decade since the Financial Crisis, but the supply of affordable housing still has not caught up with demand.

The decade following the Financial Crisis would have been ideal for investing in the affordable multifamily segment. It may still be an ideal segment to invest in for the coming “lost” decade. Maybe there will be more opportunities in another segment. The key is to be open to the opportunities and not let the situation in the public markets deter you from other opportunities.

Housing is one ideal alternative asset to invest in during a downturn, but it’s not the only option. Smart investors are drawn to all types of private alternative assets for their insulating qualities against volatility, cash flow, growth, and tax benefits.

​​What do these smart investors look for in turbulent times? They chase DEMAND. They chase essential assets that consumers are always going to need.

​​Affordable housing is a prime example of a recession-proof asset that serves as an inflation hedge. It won’t be the only segment that will offer opportunities. For example, during the pandemic, the industrial segment soared from demand for warehouse space to accommodate the heated flow of shipping from online shopping. The key is to follow demand.

As recession and bear market buzz grows louder, investors can retreat or tackle the situation head-on. With all the uncertainty facing public equities, in-demand, cash-flowing alternative assets insulated from broader market volatility are ideal for weathering economic storms.

It’s time to invest differently. It’s a new world and a new economy.

​​The next decade may be a lost decade for stocks, but there will be opportunities in the private market – especially the market for essential assets and goods. Opportunities will appear.

​​You just have to be ready to take advantage of them.

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Michael Foley

Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.