Investors Are Ignoring Two Major Risks to Stocks, Warns Fund Manager Mike Shell

"Our call of the day from Mike Shell, founder of investment firm Shell Capital Management, tells MarketWatch that investors are ignoring two risks right now—the “high valuation and age of this bull market and the risks it poses for the long run.”

The market “doesn’t have to fall just because it has been trending up for over a decade, but the valuation and expected return from this starting point are pretty simple,” he says.

For example, the current dividend yield—annual dividend payment to shareholders—is less than 2%, while the price/earnings (P/E) ratio for companies—a way of valuing a stock’s worth—is 30. And earnings growth is below that of decades earlier, Shell says. 

“The long-term expected return is a summation of these, so when we add it up, it is maybe 4-5% from this starting point,” the manager of the Asymmetry Global Tactical fund says. “That is half the 10% historical return investors are told to expect, which is the average since 1924 commonly seen on a broker’s wall.”

So in 1924, the dividend yield was 5% and the P/E was 10, which allowed for a lot of expansion, and earnings growth was higher than we’ve seen recently, he says.

Shell is also wary of a possible downswing for stocks and an end to calmer market volatility than we’ve been seeing."

Read the full interview at Barron's: Investors Are Ignoring Two Major Risks to Stocks, Warns Fund Manager