Eq: Large Cap

(New York)

This Barron’s article says that investors have been valuing the stock market completely wrong. The author argues that stock valuations should not be measured against historical valuations but by valuations relative to other asset classes. The piece contends there is little sense in comparing current valuations to other time periods as valuations do not exist in a vacuum. The outcome of this different perspective is that stocks do not look nearly as expensive relative other assets, especially bonds, as they would seem versus looking at their own history. Government bonds for instance look much more expensive than stocks, as their real returns are negative given inflation rates. And while the author admits that most asset classes currently appear scary, stocks are not as bad as they seem, though are not a “screaming buy”.

FINSUM: We think some of this perspective is useful to bear in mind, especially if one is in the position of having to put money in the market. However, being mindful of historical valuations can be quite useful.

Source: Barron’s

(New York)

A columnist at the Financial Times which this paper deeply respects has published an article arguing that “irrational exuberance” is coming to dominate the stock market and that things look headed for an inevitable fall. The market is currently trading at 18x projected earnings. To put that in perspective, it is the highest level since 2002, exceeding any valuation hit during the height of the pre-Crisis bubble or during the period of Fed QE. The author says the market must believe earnings estimates are far too bearish, as there is little other way one can understand such valuations. Such expectations are irrational, as they are bet against history—when earnings have declined for as many quarters as they currently have, stocks have always had a bear market.

FINSUM: This is a good article which draws on a range of perspectives to argue its point. However, we are not totally in agreement with it, as we think that historical valuations mean little when the macroeconomic and monetary policy environment is so radically different.

Source: Financial Times

(New York)

If you have ever heard of George Soros, and almost everyone who has ever invested in stocks has, you will be well aware that he is not afraid of making big bets, such as when he “broke” the Bank of England. This story covers his view on the stock market, saying that Soros has just doubled-down on his bet against the S&P 500. Soros had been holding 2.1m “put” options on the stock index since March, but yesterday disclosed that he was now holding about 4m, showing that he has almost doubled the size of his bet against the market. The position reflects Soros’ view that we are hurdling towards a financial crisis, which he also held and communicated in 2007.

FINSUM: This is a seriously contrarian bet that takes some guts considering how much the S&P 500 has risen lately. Worth paying attention to as bullish sentiment builds.

Source: Wall Street Journal

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