Seth Klarman, a well-known value investor in a recent letter to clients, talked about “perilously high valuations”. In addition, we recently heard from Goldman Sachs on the downside of the so-called “Trump rally”.
Here is an article from Forbes, detailing some of the latest “bearish calls” on the US stock market, from a number of different perspectives.
The following is a spreadsheet kept here at Trinity using JP Morgan’s “Guide to the Market” statistics:
Frequently, using “averages” can get you into trouble, but looking at the markets on a number of different valuation metrics, there doesn’t seem to anything too alarming about the valuation of the current stock market.
No doubt we can find pockets of overvaluation – you can still make a good case for the FANG stocks being overvalued, but that has been the case for some time. Seeking Alpha’s website is loaded with negative stories and comments on Amazon and Tesla – both seemingly wildly overvalued stocks based on traditional metrics – although both are “disruptors” for sure in their respective spaces, and both stocks have demonstrated consumer appeal and consistent demand. (Amazon without question, while, with Tesla, a few questions remain.(Long AMZN in many accounts, TSLA in fewer accounts.)
Look at the Treasury market: relative to long-term “real” (i.e. inflation-adjusted) rates of return, Treasuries have looked wildly overvalued, maybe the last 8 years, and certainly the last few years. Bond fund inflows totaled $163 billion in 2016, versus negative outflows in stock funds ?
Analysis / conclusion: As years have gone by, more and more I put a premium on investor sentiment and looking at the AAII data here. Currently just 33% of individual investors (polled weekly by AAII) are now “bullish”. The distribution is evenly divided by 1/3rd’s, bullish, bearish and neutral.
The hallmark of this bull market off the ’09 lows is that the Street and individual investors tend to turn bearish very quickly, the Street has tended to underestimate SP 500 earnings strength (something that has worked fortuitously for this blog), and investors have become complacent about the risks in the bond market.
To be sure this isn’t a criticism of Seth Klarman or any other investor making a market call. If Seth is a “deep value” investor, his valuation metrics might have called the SP 500 overvalued in June of 2009. Doug Kass, the noted short-seller that writes for Jim Cramer’s “TheStreet” would be negative for years, and then very, very right. Doug called the overvaluation in Technology in the late 1990’s, and then went long in early 2003, but again looked to flip negative again in June, 2003, roughly 4 years and a few months ahead of the October, 2007, peak.
The point is to readers, is that there is a constant stream of opinions on the market and stocks and bonds, put forth everyday to feed the beast that is the mainstream and financial media.
The biggest failure – in my opinion- on the part of the individual investor or those “lay people” on Boards of endowments or public pension funds, is that they seem to think there is one person, (Bill Miller, Bill Gross, Peter Lynch, etc), or one firm (i.e. Goldman Sachs, Fidelity, etc.) or one style (growth, versus GARP, versus value, etc.) or one methodology (or one anything, really) that can succeed and deliver out-performance in all markets, but to readers, I say, there is no such beast.
Patience and discipline are probably your best investing tools, and play “the long game”.
My own opinion on “market valuation” using the above JP Morgan valuation spreadsheet is that the SP 500 is simply “walking up” SP 500 earnings growth. There hasn’t been too much “P.E expansion” in the last 3 years on the US stock market. The other opinion discussed with client’s is that this is a relatively “controlled” bull market, and it is highly likely to continue, and by controlled I mean the complete absence of any real bullish sentiment. This US stock market rally has been hated for years.
To conclude, these are just personal opinions, and readers should do your own thinking. A correction could hit the SP 500 at any time from an exogenous shock (or for any other reason really) but long-term investors should use that opportunity to allocate capital to the market.
How fiscal policy and tax reform unfolds this year will be critical for the SP 500 in my opinion. That could/should be the next major market catalyst.
Thanks for reading.