Equities are expensive. It’s difficult to argue against this. But does this also mean that markets will fall sharply? Assuming that there are plenty of other factors that could drag equity prices lower, the high valuation alone is probably not enough reason for a new market correction. Granted, the price-earnings ratio is high, in some cases even historically high. The Shiller PE, which looks at corporate earnings development over the last ten years, is over 30 in the US, which happens rarely. And the graph shows that Warren Buffett’s favorite valuation indicator – total market capitalization as a percentage of GDP – also indicates historically high equity valuations. Correction looming? Are the high equity valuations the harbinger of a correction? Given the high degree of … [Read More...]
It’s too early to get too gloomy about stocks
An unexpected and unfortunate outbreak of the coronavirus puts pressure on the sustainability of the increase in global growth momentum. The fact that the uptick in momentum had only just started makes it relatively vulnerable to any negative shocks. In addition, the significant amount of uncertainty related to containing the virus as well as its economic impact requires an appropriate cautious stance on risky assets. ‘Appropriate’, however, does not imply getting too gloomy too early, as other factors remain positive for risky assets, and for equities in particular. Global health emergency On 30 January, the World Health Organization declared a global health emergency related to the coronavirus outbreak in China. Since then, an increasing list of countries and companies have taken numerous measures to prevent the virus from … [Read More...]
2020 in tweeted charts!
Welcome to the 2020 edition of ‘the year in tweeted charts’: a reasonably concise overview of the year, with some eye-popping graphs. But, also, a useful exercise to improve my understanding of market dynamics and future investment decisions. Here goes… New highs The year started off well, with equities continuing their stellar run – the S&P 500 realized a return of more than 30% in 2019, remember – and rising 3% in the first few weeks of January. It seemed, therefore, that the longest bull market in history would last a little while longer. The longest bull market in history! https://t.co/DRLRs6DmW8— jeroen blokland (@jsblokland) January 06, 2020 What virus? If only we knew what was coming. There was an occasional mention of some new flu-… [Read More...]
The average return doesn’t exist (2020 edition)
Here’s this year’s update of the ‘average return doesn’t exist’ blog showing that the average return on equities is mostly a statistic, and is seldomly seen in reality. And last year is another brilliant example of that. The Dow Jones Industrial Average realized a a positive return of more than 22% in 2019, miles away from the average return of 7.4% since 1900. It also underpins that using this long-term average for forecasting annual returns, as many professional forecasters tend to do, will do little good for your ‘guru’ status. Those who dare to put in ‘obviously’ far too bearish or far too bullish forecasts have (much) better odds in getting it right. The graph below shows the calendar year returns on the Dow Jones Industrial … [Read More...]
The average return doesn’t exist (2021 edition)
Welcome to this year’s update of the ‘average return doesn’t exist’ blog, revealing that the average return on equities is mostly a statistic, and is rarely seen in reality. However, paradoxically as it may seem, it is 2020, one of the most extraordinary and volatile years in history, which shows that the average return has not become extinct. The return on the Dow Jones Industrial Average for 2020 measures 7.2%, just a whisker below the average return of 7.4% since 1900. Even though last year’s return was close to the long-term average, historical data show that using this long-term average for forecasting annual returns comes with a low probability of getting it right. Those who dare to put in ‘obviously’ far too bullish forecasts have much … [Read More...]
The momentum for fiscal stimulus is building
US President Trump is calling for a payroll tax relief until after the US elections. Australia just announced a EUR 11 billion package to counter the adverse impact of the coronavirus. The European Commission set up a fund yesterday with EUR 25 billion to tackle to economic shock caused by the virus. The UK raised already anticipated fiscal stimulus by another GBP 18 billion. And these are just a selection of the number of measures that is being announced. Most measures are, however, disappointingly limited. The European Commission’s investment fund represents just 0.2% of GDP, and are taken from existing resources. Hence, the reluctance of governments to really open the tabs increases the odd of a global recession. Forecasts for 2020 GDP growth are around 2.0% (2.4% by the OECD) … [Read More...]
Snookered
Did Jerome Powell, Chairman of the Federal Reserve, get himself into a pickle? With bond yields still on the rise, it´s starting to look that way. The markets seem to be testing the Fed chief’s pain threshold, which could result in an interesting game of chicken. The press conference on 17 March was arguably his best to date. It contained neither doubts nor unexpected digressions to difficult topics. Powell was as clear as he could possibly be: don’t expect tighter monetary policy until maximum employment has been reached, and there is a sustained rise in inflation to 2% in sight. Well, that’s going to take a while. But this powerful confirmation of the forward guidance may lead to an interesting showdown with markets in the coming months. … [Read More...]
Revenge of the old economy
Prices in the real economy are lagging far behind prices on the financial markets. But with a historic amount of stimulus, focused increasingly on an ‘old school’ recovery, a catchup appears to be in the making. Not before time. The graph below from Goldman Sachs is currently one of my favorites. All things linked to inflation – so, not only consumer prices but also wages and commodities – have failed to keep pace with prices on the financial markets. Not surprisingly, as monetary policy, and to some extent also fiscal policy, has focused exclusively on the financial markets since the global financial crisis. Back in 2008, that made sense. The entire system was on the verge of collapse. But in the ten subsequent years of recovery, little changed. … [Read More...]
The Great Lockdown Recession
The IMF published new estimates for the global economy, which weren’t great – to put it mildly. The coming quarters will be historically poor and the risks will remain thereafter. Nevertheless, the financial markets have shown a strong recovery in recent weeks. Can these developments be reconciled with one another or will markets come under pressure again? Source: International Monetary Fund Biggest contraction in almost 100 years The IMF predicts that the global economy will contract by no less than 3% this year. This represents the biggest global economic downturn in almost a century. It’s no coincidence that the IMF has called it the ‘Great Lockdown Recession’, because along with the Great Depression and the great financial crisis, this too will go down in history. Unsurprisingly… [Read More...]
Bond issues
What to do with government bonds? The yield on government bonds is historically low, while the risk is high. In the event of rising inflation, they offer little or no buffer. Nevertheless, we shouldn’t ban them completely from multi-asset portfolios just yet. In one of my Daily Sketches I showed that, based on the Rule of 72, it would take 147 years for an investment in 10-year US Treasury bonds to become worth twice as much. The rule of 72 is where you divide 72 by the expected annual return to get to the approximate number of years it would take for that investment to double in value. And that’s the good news. For German Bunds, for which you have to pay for the privilege of owning them, … [Read More...]