Will S&P 500 Retest Recent Low By End of April

[Spekulatius]

 

Central banking has increasingly become a confidence game. The economic theory suggests the monetary transmission mechanism is actually fairly slow...at least a year or two before it feeds through to the real economy. But policy announcements and forward guidance can change expectations within seconds.

 

I think Fed liquidity has been a great backstop and should prevent a credit crunch. But it isn't going to prevent a deep and prolonged recession which remains one of the possible economic outcomes of all of this.

 

Central banking always has been a confidence game. That’s all there really is to it. once confidence is lost, the currency is worth . Germany has a bit experience on that matter. The older generation at least would take a recession over debasement any time, because it is quite possible the get both.

[rb]

 

Central banking has increasingly become a confidence game. The economic theory suggests the monetary transmission mechanism is actually fairly slow...at least a year or two before it feeds through to the real economy. But policy announcements and forward guidance can change expectations within seconds.

 

I think Fed liquidity has been a great backstop and should prevent a credit crunch. But it isn't going to prevent a deep and prolonged recession which remains one of the possible economic outcomes of all of this.

 

Central banking always has been a confidence game. That’s all there really is to it. once confidence is lost, the currency is worth . Germany has a bit experience on that matter. The older generation at least would take a recession over debasement any time, because it is quite possible the get both.

My guess is that they're not thinking about debasement at all. As is they think that as soon as people will want to spend any of this liquidity they'll mop it all up through reserve requirements. That strategy has worked in the past, but then we were talking billions, not trillions.

 

At this point I'm trying to wrap my head around what that would look like for the banks.

[SHDL]

Small investors are apparently piling into bullish options like never before:

 

https://www.bloomberg.com/news/articles/2020-05-19/sundial-says-extreme-options-sentiment-is-awful-omen-for-stocks

[Uccmal]

Small investors are apparently piling into bullish options like never before:

 

https://www.bloomberg.com/news/articles/2020-05-19/sundial-says-extreme-options-sentiment-is-awful-omen-for-stocks

 

Not a good sign. 

 

I see Facebook has now surpassed its all time high along with Home Depot.  And Apple and Google are working on it.  It is fortuitous that I hold all of these except Google.  Middling positions.  The market in aggregate seem to see these mega caps thriving, and they are. 

 

The S&P wont be testing new lows any time soon.  The market has bifurcated. 

[Gregmal]

One angle to look at; if the economy doesnt start improving, and Trump loses the election, Republicans also probably lose the Senate, you're going to see A LOT. of money get sent to everyday people. You'll also probably see higher corporate taxes too. But the consumer will be fine.

[jfan]

https://riwi.com/research/us-2020-election-uncertainty-grows-in-may/

 

Unofficial poll

[mattee2264]

https://www.cnbc.com/2020/05/21/many-americans-used-part-of-their-coronavirus-stimulus-check-to-trade-stocks.html

 

 

[TwoCitiesCapital]

One angle to look at; if the economy doesnt start improving, and Trump loses the election, Republicans also probably lose the Senate, you're going to see A LOT. of money get sent to everyday people. You'll also probably see higher corporate taxes too. But the consumer will be fine.

 

For what it's worth, I think out of all my concerns regarding impacts to the market (solvency/default, contracting earnings/multiples, multiple waves of COVID, etc), the one that is most likely to occur is higher corporate taxes.

 

We just bailed out corporate American in 2008 and we're doing it again in 2020 just 3 years after giving them tax cuts that they blew on dividends and repurchases instead of deleveraging and/or capital investment. There would likely be massive popular support for raising corporate taxes in response - particularly if it means we don't have to raise individual income taxes.

 

So even if I'm wrong about everything related to the economy and COVID-19, there still seems to be a very real threat to corporate profits via higher taxes, but the market is telling me it's a non-issue like all of my other concerns regarding corporate profits and the prices we pay for them.

 

Maybe J Pow and the S&P 500 really can save us all from everything...

 

[mattee2264]

I think another issue that is being pushed down the line is the impact of eventually withdrawing the life support which I think we will have to do eventually or else individuals and businesses will become dependent on government money and unable to stand on their own two feet even when it is "safe" to go back to work and re-open businesses.

[Castanza]

I think another issue that is being pushed down the line is the impact of eventually withdrawing the life support which I think we will have to do eventually or else individuals and businesses will become dependent on government money and unable to stand on their own two feet even when it is "safe" to go back to work and re-open businesses.

 

individuals and businesses will become dependent on government money and unable to stand on their own two feet

 

That ship sailed a long time ago.

 

Interest rates barely went up after 09. People became addicted to the low interest rates and subsequent raging 10 year bull market. We live in a credit addicted, got to have it now, no-consequence, entitled, bubble wrapped society.

[DooDiligence]

I think another issue that is being pushed down the line is the impact of eventually withdrawing the life support which I think we will have to do eventually or else individuals and businesses will become dependent on government money and unable to stand on their own two feet even when it is "safe" to go back to work and re-open businesses.

 

individuals and businesses will become dependent on government money and unable to stand on their own two feet

 

That ship sailed a long time ago.

 

Interest rates barely went up after 09. People became addicted to the low interest rates and subsequent raging 10 year bull market. We live in a credit addicted, got to have it now, no-consequence, entitled, bubble wrapped society.

 

Truth.

 

Lawyers hammer the airwaves incessantly with the idea that we aren't obligated to pay back debts. "Are you tired of calls from harassing bill collectors?"

 

Social security disability, no problem, you are not obligated to work and we'll prove to the guvmint that you are cray-cray so they'll start sending you eckchays.

 

Ambulance chasers have been telling us that nothing is our fault for decades now, "Let me help get you the money you deserve", and I hear many of these legal weasels actually describing "slip & fall" as an area of expertise, on TV ads.

 

Add to this, modern medicine has made it possible for us to live recklessly in the knowledge that someone will provide a therapy to right the wrong.

 

Fat & lazy, take a pill.

Depressed & hazy, take a pill.

Straight up whack-a-doo crazy, take a pill.

 

If any of these pills do you further harm, don't fret, there's a jack-leg waiting to take your call.

 

Now the highest executive officer in the land puts the capstone on "take no responsibility", and the sheeple eat it up.

 

Has there ever been a parallel that involved this extent of entitlement of the general populace in another country / era, and if so, how did it turn out?

 

Will we ever have national leadership that inspires integrity and hard / smart work in the general populace, ever?

 

As to the original question posed by this thread, I think we should be asking, "Will US businesses test new lows?"

[SHDL]

 

I was recommended this interview which touches upon a lot of what was discussed in this thread and elsewhere on this board. The interviewee is a young guy and some of the ideas discussed seem a little far fetched (like if the S&P were to drop 20% tomorrow politicians will panic and put out a stimulus bill so large it will create a huge asset price bubble that brings the S&P above 4000 by year end) but interesting stuff nonetheless.

[UK]

https://www.barrons.com/articles/u-s-stocks-are-risky-what-gmos-ben-inker-says-to-buy-instead-51590192015

[Gregmal]

https://www.barrons.com/articles/u-s-stocks-are-risky-what-gmos-ben-inker-says-to-buy-instead-51590192015

 

 

This guy is gloriously arrogant, even for a finance guy. "markets have been wildly overvalued for 20 years"...LOL. No. Just because YOU disagree with the valuation, doesnt make that true. A year? Maybe... Two decades? GTFO

[TwoCitiesCapital]

https://www.barrons.com/articles/u-s-stocks-are-risky-what-gmos-ben-inker-says-to-buy-instead-51590192015

 

 

This guy is gloriously arrogant, even for a finance guy. "markets have been wildly overvalued for 20 years"...LOL. No. Just because YOU disagree with the valuation, doesnt make that true. A year? Maybe... Two decades? GTFO

 

On the flip side, can you explain why markets COULDN'T be overvalued for bulk of two decades?

 

I tend to agree that isn't useful for every-day investor in terms of timing the market, but on the flip side, there are periods at market bottoms that show bonds dramatically outperforming stocks for long periods of time (we just had an example at the market lows in March - bonds had outperformed equities annualized for the preceding 20-years). That shouldn't be reasonably possible after 20-years of compounding unless if markets were dramatically overvalued when purchased and/or dramatically undervalued when sold.

 

I tend to believe there are long term cycles in markets which are fueled by inflation and debt cycles which expand and contract P/Es and profit margins. It's not uncommon for these to span 1-2 decades and we've had periods in the past where nominal stock returns were close to 0% per annum over 10-20 years and real stock returns worse (we just witnessed one from March 2000 to March 2020).

 

 

"Sure," you say, "but the starting point was the tech bubble and the end point was a local market low." I'll give you that, but I don't think it's so wild to think that markets have been overvalued much of that time which explains why a single drawdown of can destroy 2-decades worth of relative out-performance.

 

As far as making it useful to investors with a finite life span, I imagine you did alright by buying stocks at, or below, average valuations (early 2000s after the tech bust, 2008/2009, following the drawdown in 2015, and March 2020)  and slowly moving to a mix of Treasuries/corporates/MBS/munis in periods when valuations were more than 1 standard deviation above long-term averages following those purchases.

 

I can't say whether or not it would've beat the S&P because we could argue all day about the measure to use for the 1 std dev, (price to book, price to earnings, price to cash flow, EV/EBITDA, etc) and how much to move at a time, but you'd probably have been damn close with far less volatility and which is enough for me to say there is some validity to the market being overvalued much of that time if it's isn't clear that equities dramatically outperformed over the preceding 20-years.

 

[Read the Footnotes]

https://www.barrons.com/articles/u-s-stocks-are-risky-what-gmos-ben-inker-says-to-buy-instead-51590192015

 

 

This guy is gloriously arrogant, even for a finance guy. "markets have been wildly overvalued for 20 years"...LOL. No. Just because YOU disagree with the valuation, doesnt make that true. A year? Maybe... Two decades? GTFO

 

Maybe I'm just biased because I've spent time talking with him and I know how smart he is, and that he thinks like a value investor, but I can't see how you took that away from the article.

 

He basically says that domestically in the USA it's a stock pickers market and the stocks to pick are value stocks. Otherwise he likes emerging markets. That seems to be pretty close to his default position for 10-20 years based on my familiarity with him. He got really excited and bought more broadly for a brief period and then lightened up. So how does any of that make him an idiot?

 

By the way, I think the stuff that GMO puts out to attract attention is not necessarily their best thinking it is just a teaser and not necessarily representative of the ways in which they have added value for their clients when they have added value. That should be a surprise as that is often the case for people and firms that have shown some degree of investing ability and fundraising ability. In the case of GMO, I think that has led to misconceptions among some. 

[UK]

More on the same: https://www.telegraph.co.uk/business/2020/05/26/fund-called-last-two-crashes-starts-short-global-stock-markets/

[Gregmal]

For one, I dont think he is an idiot.

 

Second, generally speaking I do agree with the bulk of what he is saying.

 

That said, 20 years is between 30-50% of ones useful investing life assuming ages 20/25-60/70 or some variance of that. If you want to look at bonds, who is to say bonds are not in a massive multi decade bubble? Why is it widely assumed that the bond market is accurate but the stock market subject to "valuation" concerns? IMO 0-1% long term interest rates is infinitesimally more egregious that a 20-25x multiple on stocks.

 

My main point, perhaps missing the forest for the trees in an otherwise reasonable article, is the sheer absurdity to anyone making some kind of self aggrandizing, wanton claim about "the market" over a period of time THAT long!

[TwoCitiesCapital]

For one, I dont think he is an idiot.

 

Second, generally speaking I do agree with the bulk of what he is saying.

 

That said, 20 years is between 30-50% of ones useful investing life assuming ages 20/25-60/70 or some variance of that. If you want to look at bonds, who is to say bonds are not in a massive multi decade bubble? Why is it widely assumed that the bond market is accurate but the stock market subject to "valuation" concerns? IMO 0-1% long term interest rates is infinitesimally more egregious that a 20-25x multiple on stocks.

 

My main point, perhaps missing the forest for the trees in an otherwise reasonable article, is the sheer absurdity to anyone making some kind of self aggrandizing, wanton claim about "the market" over a period of time THAT long!

 

I think we're broadly on the same page then - because I generally agree that the market was overvalued for much of that time, but that there were still places and ways to invest to make a reasonable return and that is what GMO is being paid to do.

 

As far as bond being overvalued, I probably also agree in the long-term. That being said, assuming we don't get hyperinflation, the losses from bonds reverting back to fair value yields over the course of the next decade doesn't look anywhere near as bad to me as the potential losses accruing to equities in margins or inflation normalize OR the markets realize that the current corporate earnings drawdown isn't just going to immediately reverse.

 

[buffetteer1984]

I agree it's one thing for the markets to misprice for a short period of time but to say it was mispriced for 20 years is suggesting ALL capital investing during that time was dumb money.  Not to mention everyone's favourite oracle has for a long time said markets are cheap, whether his actions suggest it or not.  Valuation at the end of the day is subjective.  Subjective to everyone's risk tolerance, hurdle rates, discount rates etc.  No ONE person can say it's overvalued when the price is the price for that long.

 

For one, I dont think he is an idiot.

 

Second, generally speaking I do agree with the bulk of what he is saying.

 

That said, 20 years is between 30-50% of ones useful investing life assuming ages 20/25-60/70 or some variance of that. If you want to look at bonds, who is to say bonds are not in a massive multi decade bubble? Why is it widely assumed that the bond market is accurate but the stock market subject to "valuation" concerns? IMO 0-1% long term interest rates is infinitesimally more egregious that a 20-25x multiple on stocks.

 

My main point, perhaps missing the forest for the trees in an otherwise reasonable article, is the sheer absurdity to anyone making some kind of self aggrandizing, wanton claim about "the market" over a period of time THAT long!

[vinod1]

One needs to understand what GMO means by overvalued. The main assumption is that fair value means that stocks are priced at a level that can be expected to generate 6.5% real returns.

 

They talk about this multiple times and in every monthly 7 year expected returns chart, they have a dotted line that shows the 6.5% real return level.

 

When Buffett talks about stocks being good value or reasonably priced he is talking about returns relative to bonds. He does not baseline stocks to 6.5% real.

 

Hussmann and others who pound the table that stocks are overvalued believe that 6.5% real returns are a divine right of investors. Sort of like the gravitational constant that holds true forever.

 

We have about 150 years of capital market returns. If we think 20-30 years as long term, we have 5-7 non-overlapping periods of stock market returns. It is almost like drawing inferences from the results of 5-7 coin tosses. I think we need to be much more skeptical about drawing conclusions (w.r.t stock market valuations) given the data we have.

 

Vinod

 

 

[meiroy]

https://www.bloomberg.com/news/articles/2020-05-28/trump-furious-at-twitter-aims-executive-order-at-tech-giants?utm_medium=social&utm_source=twitter&utm_content=business&utm_campaign=socialflow-organic&cmpid=socialflow-twitter-business

 

Welp, it seems the government feels the S&P500 is too high.

[mattee2264]

It was sloppy wording. Buffett is always careful to qualify any statements he makes about the market and GMO should have enough sense to do so as well.

Essentially their argument is based on the idea that profit margins and returns should be mean reverting. That is true in an industrial economy but in a services economy dominated by technology companies that ain't necessarily so.

 

The argument against regulating tech companies is that in theory creative destruction should in theory create dynamic competition over time. I'd agree though that letting them snap up any potential competitors before they get off the ground weakens this competitive dynamic.

[TwoCitiesCapital]

I agree it's one thing for the markets to misprice for a short period of time but to say it was mispriced for 20 years is suggesting ALL capital investing during that time was dumb money.  Not to mention everyone's favourite oracle has for a long time said markets are cheap, whether his actions suggest it or not.  Valuation at the end of the day is subjective.  Subjective to everyone's risk tolerance, hurdle rates, discount rates etc.  No ONE person can say it's overvalued when the price is the price for that long.

 

For one, I dont think he is an idiot.

 

Second, generally speaking I do agree with the bulk of what he is saying.

 

That said, 20 years is between 30-50% of ones useful investing life assuming ages 20/25-60/70 or some variance of that. If you want to look at bonds, who is to say bonds are not in a massive multi decade bubble? Why is it widely assumed that the bond market is accurate but the stock market subject to "valuation" concerns? IMO 0-1% long term interest rates is infinitesimally more egregious that a 20-25x multiple on stocks.

 

My main point, perhaps missing the forest for the trees in an otherwise reasonable article, is the sheer absurdity to anyone making some kind of self aggrandizing, wanton claim about "the market" over a period of time THAT long!

 

Not necessarily dumb money. Just willing to dance while the music is playing

 

I don't think any of us would call Stanley Druckenmiller dumb money, but even he went long tech stocks at the top of 2000 equity bubble b/c he couldn't stand sitting out anymore.

 

Market participation at high prices is a reflection of people seeing few alternatives and feeling like they have to play along. Most of these people won't just take their ball and go home when markets are ridiculous like Buffett did with his partnerships.

 

But none of that changes the facts that markets have been expensive for most of the last 20 years using just about any metric available -  earnings multiples (both long-term and short-term), cash flows, equity values, replacement values, dividend yields, PEGs, etc. And it's even worse if you believe some of those things are unsustainable like GMOs concern on profit margins, or the lack of regulation/anti-trust action in the tech space, or benign inflation between 0-2%.

 

There's no reason markets COULDN'T be overvalued for much of a decade or two just like we have historical examples of markets being desperately cheap for decades at a time like after the Great Depression and the 1970s.

[physdude]

It is kind of interesting that nobody thought of putting up a survey on whether we will hit all time highs again within 2-3 months in March (TBH, I would have thought that such a person was at least a bit screwed up in the head if such a poll had appeared then). If there is any lesson, it is that the market can do something that nobody expects and looks totally insane.

 

I am totally puzzled by this meteoric rise in the market and am not ashamed to say that I got on the wrong end of it (a couple of technical signals I use caught the bottom pretty well and, while they never told me to sell, simple valuation and economic news caused me to sell the little bit that I bought at the lows when it got 20% higher). Every bit of common sense tells me that the market would be overvalued even if we didn't have the riots and the pandemic and, with them included, it has to be a bubble. I have a bunch of puts based on that but I wouldn't be surprised if they expire worthless.