Can the market let the air out of the bubble without consequence? The answer relates to my post on economic cycles. That is, panics and busts only occur after booms and bubbles. But what a minute – are you saying this is a bubble? My answer to that is look at where we are in relation to the long-term mean. That’s your litmus test. For example, if we simply take the S&P 500 – it trades at ~22x forward earnings (on the assumption earnings growth this year is 12%). The 10-year average forward PE for the S&P 500 is ~18x (mostly as a function of long-term yields trading near zero). And the 100-year forward PE average is closer to 15.5x. And if we look at tech specifically – valuations are even more extreme.
Wall Street Cheer a “Strong Jobs” Report… Should They?
Wall St. cheered a perceived ‘strong’ monthly June jobs report. The economy added 206K jobs last month – however the unemployment rate moved to 4.1% – its highest level in 2 years. Here’s the thing: there was a lot of weakness in the labor market – with most of the jobs coming from government. In addition, April’s job gains were revised lower by 111K. And May was revised lower by almost 60K. I think there is material underlying weakness (reflected in slower Real GDP and PCE) and perhaps enough for the Fed to start cutting rates in September or November.
What Does Kolanovic See That Others Don’t?
Most analyst year-end S&P 500 targets range from 4200 to 5600 for equities; and 3.00% to 4.75% for 10-year yields. My guess is we will land somewhere in between these zones. On the whole, it’s fair to suggest Wall Street feels ‘comfortable’ with holding equities. Consensus year end targets average 5400 – which tells me most don’t expect stocks to do much between now and year’s end. More important – they don’t expect stocks to lose any ground. This post expands what I think is the single most important variable (and risk) with these forecasts: the relative health of the US consumer and their ability to continue spending.
Buying is Easy… Selling is Hard
Do you consider yourself a “good” or “bad” investor? For example, one might say a good investor is someone who beats the returns of the Index over a long period (10.5% annualized). Beating the Index over the long-run is difficult to do… very few fund managers are able to do it. But what if I framed the question this way: (i) bad investors think of ways to make money; vs (ii) good investors think of ways not to lose money. Which one best summarizes your approach to speculation? Of the several thousand posts I’ve written the past 13+ years – this is arguably the most important question you could ask. If you understand the gravity of this distinction… you have a good chance of succeeding.
For a full list of posts from 2017…