1999 again?

[jschembs]

Seems a bit tough to use Q1 earnings data to talk about market valuation right now. There is no question Q2 earnings are going to be meaningfully lower, and I haven't seen any compelling arguments in favor of a rapid recovery.

[Guest cherzeca]

Really? Coke at 80x PE was a brave new world? Sure, sure, that's one example. But the stock market as a leading indicator is a bunch of crock. If we look at it it's not very good at predicting much of anything. overall it's somewhat more right than it is wrong. But a great indicator it is not.

 

a leading indicator can be proven wrong by events, and still be a leading indicator. 

[muscleman]

It does feel like 1999 now with a lot of my friends showing off stock trading profits on facebook and other social media. :o

[stahleyp]

Seems a bit tough to use Q1 earnings data to talk about market valuation right now. There is no question Q2 earnings are going to be meaningfully lower, and I haven't seen any compelling arguments in favor of a rapid recovery.

 

Fair enough. But even if they drop 67% (great depression level from Dec 1929 to Dec 1932), you're still looking at earnings yield higher than bonds. Though I wouldn't be surprised if earnings drop worse than that temporarily.

 

Now, obviously if folks aren't comfortable with that, I totally get it. But it seems pretty clear that if you're going to invest that 10 years from now stocks should to do a lot better than bonds (and probably cash). Now if you jack up rates or increase corporate taxes, that might change.

 

6 months from now? Who knows.

[Jurgis]

Earnings yield in 1999 was 3.04%.

 

73 / 1469 == 5%

[stahleyp]

Earnings yield in 1999 was 3.04%.

 

73 / 1469 == 5%

 

Well, that's what I get for trusting the numbers and not doing the math myself.

 

So why does mutpl say "Jan 1, 1999 3.04%?"

 

Or "Jan 1, 2000 3.44%?"

 

 

Even if I pull their own numbers:

 

Dec 31, 1999 73.38

Dec 1, 1999 1,428.68

 

So I have no idea why their site says 3.x% instead of what the math actually says.

 

 

I'm sure I'm making some kind of mistake. Or not understanding something properly.

 

 

 

 

 

[Spekulatius]

Earnings yield in 1999 was 3.04%.

 

10 year 4.72% in 1999

 

Current EY is 4.35% (4.25% as of Jan)

 

current 10 year .84% (1.76% in Jan)

 

So the value of stocks (compared to bonds) is a lot better now than it was in Jan.

 

Now, that doesn't mean bonds won't do better but it does give stocks the advantage.

 

For instance in 1929 EY was 5.63% and 10 year was 3.60% so crazy things do happen.

 

Of course the bonds are a crap investment too. by the way, if you compare bond yields to stock yields, you should compare investment grade bond yields (let’s say BBB) and not risk free bond yields to stock yields.

 

The analogy to 1999 is not perfect (it never is) but there are a lot of similarities

1) influx of new market participants - back then via discount brokers like E*TRADE, now via free trades Robin Hood

2) highly speculative trades with a disregard of fundamentals (I don’t think I need to elaborate here)

3) Fed overshooting - in 1999 due to the perceived Y2K problem, now due to epidemic, which unlike the Y2K is very real.

 

That’s where the parallels end unfortunately. The Economy was doing very well back in 1999 and is arguably in worse shape. The Federal budget had a surplus vs record deficits and we had a reasonable political setting back then. Interests were higher back then but were easing as well but then the Fed took the lunch bowl away after Y2K came and passed with not even a whimper. It is less likely now that this is going to happen, but who knows?

 

FWIW, if we get 5% earnings growth from 2019 levels for the next 10 years I think we can consider us very lucky.

[SHDL]

Earnings yield in 1999 was 3.04%.

 

73 / 1469 == 5%

 

Well, that's what I get for trusting the numbers and not doing the math myself.

 

So why does mutpl say "Jan 1, 1999 3.04%?"

 

Or "Jan 1, 2000 3.44%?"

 

 

Even if I pull their own numbers:

 

Dec 31, 1999 73.38

Dec 1, 1999 1,428.68

 

So I have no idea why their site says 3.x% instead of what the math actually says.

 

 

I'm sure I'm making some kind of mistake. Or not understanding something properly.

 

The 73 EPS number is inflation adjusted (April 2020 dollars) while the 1429 index level is not so the ratio isn’t economically meaningful.

 

The 3.x% earnings yield figure is correct as far as I know.

[SharperDingaan]

Complain less ....  and take advantage.

The big money will be made on the way down - when these new patsy's can't make their margin calls  ;D

 

SD

[mattee2264]

 

I think the main similarity is the "New Economy" narrative. Technology companies are seen as unstoppable and immune to the economic cycle and deserving of very high valuations and make up a significant proportion of the indexes. In both cases an accommodating monetary policy helped to support high valuations and allowed the stock market to inflate to very high levels.

 

But the main difference now is that part of the New Economy narrative is belief in the Fed's omnipotence. That is the biggest wild card here.

[Jurgis]

Earnings yield in 1999 was 3.04%.

 

73 / 1469 == 5%

 

Well, that's what I get for trusting the numbers and not doing the math myself.

 

So why does mutpl say "Jan 1, 1999 3.04%?"

 

Or "Jan 1, 2000 3.44%?"

 

 

Even if I pull their own numbers:

 

Dec 31, 1999 73.38

Dec 1, 1999 1,428.68

 

So I have no idea why their site says 3.x% instead of what the math actually says.

 

 

I'm sure I'm making some kind of mistake. Or not understanding something properly.

 

The 73 EPS number is inflation adjusted (April 2020 dollars) while the 1429 index level is not so the ratio isn’t economically meaningful.

 

The 3.x% earnings yield figure is correct as far as I know.

 

Thanks. My bad.

Using this:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

1999 earnings were 51.68. Which would have given expected return of ~3% from 1999 levels.

So 1999 was much worse in terms of valuation, whether we look at absolute numbers or relative to bond yields.

 

OTOH, earnings growth 1999 to 2019 was 6% and not 3% as I previously calculated.

 

More precise comparisons could be made by using vinod1's model.  8)

[Broeb22]

 

I think the main similarity is the "New Economy" narrative. Technology companies are seen as unstoppable and immune to the economic cycle and deserving of very high valuations and make up a significant proportion of the indexes. In both cases an accommodating monetary policy helped to support high valuations and allowed the stock market to inflate to very high levels.

 

But the main difference now is that part of the New Economy narrative is belief in the Fed's omnipotence. That is the biggest wild card here.

 

+1

 

That is probably the best way I've read of describing this phenomenon. Tech in 1999 was not as widespread as it is now, so the good SaaS businesses grew through the economic ycle (even though stock prices fell a great deal). Now, people may be mistakenly believing that tech is immune to the economic cycle, but because software has eaten the world, as Andreeseen famously said, software businesses now have to fluctuate with the economy to a greater degree.

 

 

[SHDL]

Grantham now seems to think this is a real bubble:

 

https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17

 

He has a history of calling these things correctly and taking action 1-2 years before they end, so that is something to consider.

[Gregmal]

Grantham now seems to think this is a real bubble:

 

https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17

 

He has a history of calling these things correctly and taking action 1-2 years before they end, so that is something to consider.

 

He seems to do this a lot. I find the the people who call crashes every 6 months have a perfect record in terms of having "called" all the previous ones.

 

https://www.wsj.com/articles/SB10001424052748704905604575027602834843606

[TwoCitiesCapital]

Grantham now seems to think this is a real bubble:

 

https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17

 

He has a history of calling these things correctly and taking action 1-2 years before they end, so that is something to consider.

 

He seems to do this a lot. I find the the people who call crashes every 6 months have a perfect record in terms of having "called" all the previous ones.

 

https://www.wsj.com/articles/SB10001424052748704905604575027602834843606

 

While Grantham has definitely been on the side of US stocks being said expensive, I believe it's only been since early-to-mid 2018 or so that he's been calling it a bubble and defined what he meant by bubble (could be wrong on the exact timing). And to his credit, stocks have gone very little distance over that 2-year period (despite the vicissitudes in between!) despite the Fed lowering rates back to zero, restarting QE, and massive stimulus by the Treasury.

 

I think his observation has been fair to this point.

[stahleyp]

Grantham now seems to think this is a real bubble:

 

https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17

 

He has a history of calling these things correctly and taking action 1-2 years before they end, so that is something to consider.

 

He seems to do this a lot. I find the the people who call crashes every 6 months have a perfect record in terms of having "called" all the previous ones.

 

https://www.wsj.com/articles/SB10001424052748704905604575027602834843606

 

While Grantham has definitely been on the side of US stocks being said expensive, I believe it's only been since early-to-mid 2018 or so that he's been calling it a bubble and defined what he meant by bubble (could be wrong on the exact timing). And to his credit, stocks have gone very little distance over that 2-year period (despite the vicissitudes in between!) despite the Fed lowering rates back to zero, restarting QE, and massive stimulus by the Treasury.

 

I think his observation has been fair to this point.

 

I'd be willing to bet (a substantial amount, I might add) that if the Fed/Government didn't put in stimulus, we would have had 2010 (probably even lower than March 2009) levels in markets.

 

But, I also agree with Greg that if someone is calling a bear market all the time, they're going to be right occasionally (see Klarman).

[SHDL]

Yes the guy has a cautious/bearish bias and that is something to keep in mind.

 

I’ve followed him for years now though and I get the sense that he’s unusually bearish this time. For instance in that 2010 article he says he’s trimming his equity positions very slowly and that high quality stocks should do fine or outperform. Whereas now he’s saying sell all your US stocks or even short the market. I’m not so sure if that is a good idea but he certainly has my attention.

[Cigarbutt]

Grantham now seems to think this is a real bubble:

https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17

He has a history of calling these things correctly and taking action 1-2 years before they end, so that is something to consider.

He seems to do this a lot. I find the the people who call crashes every 6 months have a perfect record in terms of having "called" all the previous ones.

https://www.wsj.com/articles/SB10001424052748704905604575027602834843606

I remember that Mr. Grantham once sounded like you: he said that people with cash tend to suffer from terminal paralysis (rigor mortis).

https://www.gmo.com/americas/research-library/reinvesting-when-terrified/

The one-page memo (which can be downloaded) holds a special place in my financial portfolio.

His fair value assessment for the S&P500 was at 900 then and many felt he was wildly optimistic...

[Gregmal]

Grantham now seems to think this is a real bubble:

https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17

He has a history of calling these things correctly and taking action 1-2 years before they end, so that is something to consider.

He seems to do this a lot. I find the the people who call crashes every 6 months have a perfect record in terms of having "called" all the previous ones.

https://www.wsj.com/articles/SB10001424052748704905604575027602834843606

I remember that Mr. Grantham once sounded like you: he said that people with cash tend to suffer from terminal paralysis (rigor mortis).

https://www.gmo.com/americas/research-library/reinvesting-when-terrified/

The one-page memo (which can be downloaded) holds a special place in my financial portfolio.

His fair value assessment for the S&P500 was at 900 then and many felt he was wildly optimistic...

 

That is an excellent article.

[Casey]

Yes the guy has a cautious/bearish bias and that is something to keep in mind.

 

I’ve followed him for years now though and I get the sense that he’s unusually bearish this time. For instance in that 2010 article he says he’s trimming his equity positions very slowly and that high quality stocks should do fine or outperform. Whereas now he’s saying sell all your US stocks or even short the market. I’m not so sure if that is a good idea but he certainly has my attention.

 

Interesting interview. In the recent past, he has usually couched his bearishness a bit more. Saying things like "I think we're overvalued here, BUT I expect the trend could actually continue positively or get even more overvalued"

 

This was much more specific and declarative.

[stahleyp]

This isn't Grantham directly but it was from his firm:

 

 

[mattee2264]

In 2018/2019 Grantham was warning about a melt-up. Now he is saying we are forming a bubble.

 

I think it is quite possible the market could go a lot higher if a V-shaped recovery does materialize and coronavirus fears subside either because a second wave doesn't materialize or a vaccine is discovered. Especially with continued supportive fiscal and monetary policy that is very fertile soil for a melt-up.

 

Economists in general are very sceptical about the V-shaped recovery idea and expect that the disconnect between the markets and the economy will correct. But what if it is the other way around and the animal spirits alive and well in the stock market spread to the real economy?

[K2SO]

I think it is quite possible the market could go a lot higher if a V-shaped recovery does materialize and coronavirus fears subside either because a second wave doesn't materialize or a vaccine is discovered. Especially with continued supportive fiscal and monetary policy that is very fertile soil for a melt-up.

 

We're not really going to know whether a second wave materializes until late 2020 - even if things quiet down, the threat will be looming over us with the return of cold weather and flu season. So it's hard to justify a runup in the market on that basis. We've got 6 months to kill until then.

 

But every day that ticks by we are one step closer to effective treatments and/or vaccine discovery. And we've already learned a lot about how to treat people and keep them out of ICU's, all of which is positive.

 

At this point I'm seeing businesses closing every day, jobs being lost that will not come back any time soon, and investors that don't seem to care.

 

[TwoCitiesCapital]

I think it is quite possible the market could go a lot higher if a V-shaped recovery does materialize and coronavirus fears subside either because a second wave doesn't materialize or a vaccine is discovered. Especially with continued supportive fiscal and monetary policy that is very fertile soil for a melt-up.

 

We're not really going to know whether a second wave materializes until late 2020 - even if things quiet down, the threat will be looming over us with the return of cold weather and flu season. So it's hard to justify a runup in the market on that basis. We've got 6 months to kill until then.

 

But every day that ticks by we are one step closer to effective treatments and/or vaccine discovery. And we've already learned a lot about how to treat people and keep them out of ICU's, all of which is positive.

 

At this point I'm seeing businesses closing every day, jobs being lost that will not come back any time soon, and investors that don't seem to care.

 

I'm pretty certain we're seeing the numbers bear out the start of the second wave as we speak. We hit a low point in daily cases at end of May with ~18k/day. Since then, multiple places have reopened and some semblance of normalization has occurred and we're back to ~25k+/cases per day for the last 4-days in a row (30k today!) - the last time this happened was early May when we were still coming down from the major spike.

 

Also, keep in mind NYC just reopened and is not yet contributing meaningfully to the spike despite being the absolute largest contributor the first time around.

 

Anecdotal evidence from friends who live in Florida, Georgia, Louisiana, Texas, and California paired with my own observations here in Missouri suggests that most people still aren't wearing masks and still aren't really taking this seriously. A second wave is all but a foregone conclusion and I think we're seeing that play out in the data today.  We're damn near close to doubling the daily case load nationwide, from the lows, without NYC contributing yet and having only been re-open for ~3 weeks.

 

 

 

 

[Gregmal]

I think it is quite possible the market could go a lot higher if a V-shaped recovery does materialize and coronavirus fears subside either because a second wave doesn't materialize or a vaccine is discovered. Especially with continued supportive fiscal and monetary policy that is very fertile soil for a melt-up.

 

We're not really going to know whether a second wave materializes until late 2020 - even if things quiet down, the threat will be looming over us with the return of cold weather and flu season. So it's hard to justify a runup in the market on that basis. We've got 6 months to kill until then.

 

But every day that ticks by we are one step closer to effective treatments and/or vaccine discovery. And we've already learned a lot about how to treat people and keep them out of ICU's, all of which is positive.

 

At this point I'm seeing businesses closing every day, jobs being lost that will not come back any time soon, and investors that don't seem to care.

 

I'm pretty certain we're seeing the numbers bear out the start of the second wave as we speak. We hit a low point in daily cases at end of May with ~18k/day. Since then, multiple places have reopened and some semblance of normalization has occurred and we're back to ~25k+/cases per day for the last 4-days in a row (30k today!) - the last time this happened was early May when we were still coming down from the major spike.

 

Also, keep in mind NYC just reopened and is not yet contributing meaningfully to the spike despite being the absolute largest contributor the first time around.

 

Anecdotal evidence from friends who live in Florida, Georgia, Louisiana, Texas, and California paired with my own observations here in Missouri suggests that most people still aren't wearing masks and still aren't really taking this seriously. A second wave is all but a foregone conclusion and I think we're seeing that play out in the data today.  We're damn near close to doubling the daily case load nationwide, from the lows, without NYC contributing yet and having only been re-open for ~3 weeks.

 

Yup. I did a bit of lightening up this week. Am actually now holding a smidge of cash and have a number of shorts on reducing exposure further. Probably most bearish Ive been since I can remember. Take all of the above, and add in that we have a 4 week void with regards to earnings. As the case load builds up, fewer and fewer companies will maker an effort to commit to any sort of guidance, now, for Q3. This on top of numbers that we already knew would be bad but expected to ramp back up. On top of this, I think there is high probability you see re-interruptions with some of the sports seasons as cases again flare up. You probably will see a number of college football teams cancel their seasons in the name of safety. Then just take what our eyes are seeing; every rally this week was aggressively faded...never a good omen. I even took a speculative gamble at the close on a reasonable sized index short. You tell me, more likely open Monday? +5% or -5%...could of course be up green but I think the skew towards some kind of massive moves definitely favors the downside.

 

That said I do think some spots have promise. I think there will be an effort to make the coastal reopening very positive. This while "episode" has been entirely news driven, so I dont think it would be unreasonable to expect that to continue.