On Wednesday afternoon, we brought you the latest from Howard Marks, who set out once again to dispel the notion that he thinks you should “get out now”, a quote he says has was falsely attributed to him after a memo he penned last summer questioning a couple of the market’s going assumptions about the supposed infallibility of FANG/FAAMG and the wisdom of blindly funneling trillions into markets via passive vehicles that by definition, do not contribute to price discovery.
In his latest memo, Marks presents both the positives and the negatives for a market that has now gone 397 trading days without a meaningful pullback. At one point, Marks observes the following:
It appears many investment decisions are being made today on the basis of relative return, the unacceptability of the returns on cash and Treasurys, the belief that the overpriced market may have further to go, and FOMO. That is, they’re not being based on absolute returns or the fairness of price relative to intrinsic value.
One of the pillars that’s allowed risk assets to remain buoyant is the notion that relative value is all that matters at this point. As Goldman explained months ago, stocks, bonds, and credit are all the most simultaneously expensive they’ve been in a 100 years.
In short, the only way a given asset isn’t expensive is by reference to other assets which are even more expensive.
One question worth asking is whether, in an environment of higher bond yields, equities are becoming less attractive the longer in the proverbial tooth the risk rally gets.
For their part, SocGen thinks the answer is a qualified “yes”. Clearly, the long answer will vary on a country-by-country basis, but we wanted to briefly highlight a couple of the points from one of the bank’s recent notes.
“The year 2017 proved to be a strong one for equity markets globally and 2018 has started on a positive note,” SocGen writes, before cautioning that “the rise in government bond yields in recent weeks has been making equities more expensive on relative basis.”
Of the 47 countries in the bank’s ERP model, equities are expensive relative to bonds in 29 of them (ERP less than average):
Here’s the kicker:
Of the global equity market cap, 76% is richly valued relative to government bonds (bottom chart).
The bottom line: “Equities have rarely been so expensive, so widely.”