It’s been a rough few months for the stock market. Now, it may come as a surprise to you that it’s been rough for the markets if you spend any time on fintwit; there’s certainly no one tweeting / bemoaning how tough it’s been out there recently (editor’s note: please read that sentence in your most sarcastic voice possible. Based on my feed, fintwit would have you believe the end times are here).
Eh historically speaking one will make more money over time being bullish. That said are things really cheap and the outlook rosy? I have my doubts. Lets not forget about the cold war with China which likely has more importance than both other conflicts combine. The national debt has surged (roughly 250k per worker..) of course that has never mattered, until one day it will. Treasuries are being dumped by the Fed, China, Russia, Japan, etc. Interest payments now exceed military spending and last I checked that was a big number. The woke hate oil, the SPR is at decades low and OPEC is actually keeping to quotas.
If those among the value set do consider cycles, I respectfully suggest some of these charts, socioeconomic and geopolitical parallels will be of interest. From those angles, we’re in 2001 redux.
1. Nobody "knows" why rates have spiked so high at the long end; and therefore
2. Nobody knows how much higher rates might levitate -
- which uncertainty has made investors more risk averse. In other words, we have two separate but very much related problems: high rates, and uncertainty about how much higher rates might go.
[Of course no one ever truly "knows" anything in financial markets, including why the market goes up or down on a given day. There is no Mr. Market that we can interrogate, but we can at least take comfort in whatever reasonable narrative might be proffered by the Talking Heads.]
While there are many guilty looking suspects (China or Japan dumping Treasuries, perhaps to shore up domestic economies or currencies, deficit-driven funding requirements, including a doom loop of higher interest costs, investors foreign or domestic loosing faith in our political leadership and fiscal management, etc. etc.), a consensus narrative has yet to coalesce. It would be easier if we could agree what to fear; instead we have each been left to stew in our own private nightmare.
Won't the mechanics of how the cap weighted indexes will behave if the wonderful 7's P/E is brought into line with the LT average or, the rest of the market, pressure all the stocks during that process? i.e. the headlines will be spitting out negative new about the price of the indexes, cross-margining requirements will force selling in all index stocks, even the "cheap/value" ones?
Your 1-2 turns guess seems pretty accurate: per Yardeni, the S&P 500's forward P/E is currently 18.3 with the "Megacap 8" but only 16.2 without them. (*)
That's an earnings yield of 6.2%. The 10-year TIPS yield is currently 2.5%, so you have a 3.7% equity risk premium, which seems perfectly fair. (It's the 2.5% real yield on TIPS that seems insane to me. The only higher reading in the last 20 years was in 2008. My guess is that will drop at least 1% once interest rate uncertainty subsides, which would move stocks up 20% all else equal.)
Eh historically speaking one will make more money over time being bullish. That said are things really cheap and the outlook rosy? I have my doubts. Lets not forget about the cold war with China which likely has more importance than both other conflicts combine. The national debt has surged (roughly 250k per worker..) of course that has never mattered, until one day it will. Treasuries are being dumped by the Fed, China, Russia, Japan, etc. Interest payments now exceed military spending and last I checked that was a big number. The woke hate oil, the SPR is at decades low and OPEC is actually keeping to quotas.
Useful perspective. Thanks for writing.
If those among the value set do consider cycles, I respectfully suggest some of these charts, socioeconomic and geopolitical parallels will be of interest. From those angles, we’re in 2001 redux.
https://oneanddone.substack.com/p/selling-tza-as-history-rhymes
Investors are freaked because:
1. Nobody "knows" why rates have spiked so high at the long end; and therefore
2. Nobody knows how much higher rates might levitate -
- which uncertainty has made investors more risk averse. In other words, we have two separate but very much related problems: high rates, and uncertainty about how much higher rates might go.
[Of course no one ever truly "knows" anything in financial markets, including why the market goes up or down on a given day. There is no Mr. Market that we can interrogate, but we can at least take comfort in whatever reasonable narrative might be proffered by the Talking Heads.]
While there are many guilty looking suspects (China or Japan dumping Treasuries, perhaps to shore up domestic economies or currencies, deficit-driven funding requirements, including a doom loop of higher interest costs, investors foreign or domestic loosing faith in our political leadership and fiscal management, etc. etc.), a consensus narrative has yet to coalesce. It would be easier if we could agree what to fear; instead we have each been left to stew in our own private nightmare.
No wonder investors are freaked.
Won't the mechanics of how the cap weighted indexes will behave if the wonderful 7's P/E is brought into line with the LT average or, the rest of the market, pressure all the stocks during that process? i.e. the headlines will be spitting out negative new about the price of the indexes, cross-margining requirements will force selling in all index stocks, even the "cheap/value" ones?
Your 1-2 turns guess seems pretty accurate: per Yardeni, the S&P 500's forward P/E is currently 18.3 with the "Megacap 8" but only 16.2 without them. (*)
That's an earnings yield of 6.2%. The 10-year TIPS yield is currently 2.5%, so you have a 3.7% equity risk premium, which seems perfectly fair. (It's the 2.5% real yield on TIPS that seems insane to me. The only higher reading in the last 20 years was in 2008. My guess is that will drop at least 1% once interest rate uncertainty subsides, which would move stocks up 20% all else equal.)
(*) https://www.yardeni.com/pub/mag8.pdf