Eq: Large Cap
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.
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
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
This Barron’s article fails to make any point at all. It is nothing more than a rehashing of various opinions on the stock market expressed through various financial outlets. However, within that, there is value, as the article compiles a number of views into a single piece. It centers on one bear case and one bull case, and gives an argument for each. The bear case focuses on the high P/E ratio of the market, the fact that earnings have been tumbling for multiple quarters, and the lack of fear shown by the VIX. The bull case says animal spirits have returned to the market as investors rotate out of defensives and into riskier shares like tech and financials, potentially a sign of a healthier market.
FINSUM: This is the sort of article journalists write when they are totally out of ideas and have a deadline (trust us), but this Barron’s piece still adds some value. We are more optimistic than pessimistic about the market in the near term, but look out for October, when the big Italian constitutional vote takes place.
This Barron’s article presents four stocks which it says have great growth potential. The piece is based on the picks of a fund manager from JP Morgan. The article argues that the big defensive led rally in the market this year has left some very good opportunities to buy growth names that have been left out of the price gains. The picks come from the technology, energy, and banking areas, and the piece even communicates some shorts, like the consumer staples sector. The article’s four picks are Occidental Petroleum, Wells Fargo, Lowe’s, and Alphabet.
FINSUM: This piece is interesting because it takes both a long and short perspective on the market, giving a holistic view.
This Financial Times article argues that the big run up in stocks recently will hinge on one crucial reality. The article contends that US stocks need to run on “more than fumes” in order to stay strong. What that means is that US corporations need to start delivering stronger earnings after consecutive declines for the last several quarters. The piece argues that investors are in for a period of high volatility as the market has rich valuations and the uncertainty of a highly polarized election upcoming. Nonetheless, the piece is optimistic, saying that it sees the market as likely to rise for three reasons: “the US profits recession appears to be over; S&P 500 sales growth improvement in the second quarter was encouraging; and we see the energy sector’s drag on earnings fading by year-end”.
FINSUM: These are some good points and we are bullish on the market until October, when all bets are off as the EU and Euro once again come into focus with the Italian vote.
Source: Financial Times