So far in 2021 the yield on the benchmark 10-year government bond has surged from 90 basis points to over 150 (hopefully you refinanced your mortgage last year) and higher rates have many investors concerned given the rapid rate of increase. Though the financial markets have become a bit more volatile lately, equities have been range-bound and peak-to-trough losses have not been more than 5 percent at the worst point.So how much concern should there be about rising rates? Given that equity prices are a function of profits as much as they are about interest rate sensitive metrics like P-E ratios, I think we really need to look at the big picture. In that sense, a 10-year bond yielding 1.5% is pretty tame regardless of where … [Read More...]
Underlying Earnings Continue to Support Strong Market Action
Most of the commentary I hear around why the U.S. stock market has gotten off to such a strong start in 2021 focuses on governmental fiscal stimulus and the Federal Reserve’s intent to keep their target funds rate low for as long as the data can possibly justify doing so. While strong consumer spending will help businesses rebound from the pandemic, and low rates support elevated valuation multiples, I think the underlying profits being generated now, and those expected over the next 12-18 months are even more of a tailwind for stock prices.As 2021 began I wrote in my quarterly client letter that consensus expectations for a record high S&P 500 profit figure in 2021 (easily surpassing 2019 levels), while certainly possible, didn’t seem like a sure thing. With the … [Read More...]
While Many SPAC Deals Overload On Speculation, Some Are Worthy Of A Look
It says a lot about where we are in the cycle when sponsors of special purpose acquisition companies (SPACs) can easily and relatively quickly make tens of millions of dollars merely by taking a shell company public and choosing an acquisition target, before long-term success could ever be determined. But with the free market system we need to take the good with the bad (so long as legalities are considered), so as much as I think the SPAC structure is a strange way to accomplish a goal, it is probably short-sighted to write off the pathway completely and never consider investing in any of the deals.Don’t get me wrong, assigning a multi-billion valuation to a revenue-less, concept company based on rosy hypothetical … [Read More...]
A Look At Pre-2008 Equity Market Valuations
We hear a lot of market commentators refer to long-term average P/E multiples for the U.S. stock market when trying to assess what “fair value” might be. It is interesting to me that oftentimes the time periods they choose to focus on often map right on to the desired conclusion they want to numerically support. For instance, the trailing 10 -year average P/E for the S&P 500 index is about 19.5. As a result, bullish Wall Street strategists can easily, and usually without much pushback, come on TV and pronounce the market cheap (at current prices – 3,735 – and current 2022 profit estimates – $224 – the market P/E is about 16.7x).Of course, over the last 10 years we have had record-low interest rates that some thought would … [Read More...]
Are Financial Markets Getting Even Less Predictable in the Near Term?
Earlier in my investment management career it was not uncommon for me to raise a fair amount of cash, say 10-20%, in client accounts when I thought the equity market was overheated. The idea was that I would have plenty of firepower when prices dropped and bargains were abundant. Over the years the data suggested that such a move was rewarding, at best, half the time. Too many instances, though, resulted in prices rising enough before they fell that the cash positions at best offered no alpha.Don’t get me wrong, I have always been in the camp that market timing in the near term is difficult (hence I would never go to 50, 75, or 100 percent cash), but I learned that mean reversion, while a real thing, could … [Read More...]