Valuations seemingly don’t matter.
I’m talking about equities, of course. While the contention that traditional valuation metrics have been antiquated by some new paradigm has historically served as the preface for an imminent meltdown, I’ve variously suggested that, at the least, this time is different on the policy front.
While there’s plenty of historical precedent for extreme monetary accommodation, the simultaneous adoption of pedal-to-the-metal easing paired with what, in late 2019, would have been described as an unthinkable amount of fiscal largesse, is “new,” to the extent anything can ever be “new under the sun,” to use the old adage. The figure (below) gives you a sense of things at the benchmark level globally.
Writing Thursday, SocGen’s Albert Edwards adopted his trademark cadence to suggest that perhaps — just perhaps — valuations do matter.
“We all know that [market participants] have decided that US equity valuations don’t matter anymore – a stance usually forced upon investors in a bull market when equity market levels can no longer be justified by any sane valuation model,” he said.
But even if valuations don’t matter, profits do, at least over the longer-term, Edwards wrote, noting that if one takes analysts’ “typically overoptimistic 18-month forward earnings and rebas[es] them to the same level of the S&P 30 years ago, we can see that a huge gap has opened up.”
All of the above recalls my discussion from a few weeks ago around the level of realized earnings needed to “justify” current multiples.
In addition, Edwards reminded investors that multiple expansion in tech has far outstripped the richening seen in the broader market, a dynamic that accelerated in earnest after Jerome Powell’s famous “pivot” on January 4, 2019.
Albert sarcastically said he’s “sure it’s nothing to worry about.”
“Nothing bad can or will happen,” he quipped, because “the Fed won’t let it.”
And they probably won’t, by the way. Let anything bad happen, I mean. That’s not to say stocks are immune from a crash, or that credit is totally inoculated against an eventual reckoning with leverage taken on in 2020 (figure below).
Rather, my point is simply to state the obvious, which is that there’s no appetite (at all) among policymakers for countenancing a sustained large downdraft in equities.
You can claim it’s not up to them if you like. At that’s true on a tick-by-tick, day-to-day basis. As discussed here on Wednesday, modern market structure is such that (really) bad things can happen before anyone can react.
But consider this. The Topix fell 0.2% on Monday, 1.6% on Tuesday and 2% yesterday.
On Wednesday afternoon in Tokyo, a Bloomberg reporter asked “with Japan’s stocks sliding and another coronavirus state of emergency incoming, can the Bank of Japan really continue to stay out of the stock market?”
The answer, as it turned out, was “no.” Hours later (maybe less), the BoJ bought 70.1 billion yen in ETFs. On Thursday, the Topix promptly logged its second-best day of 2021.
Is that absurd? Well, sure. But it is what it is. Japanese stocks fell ~3.5% over a few sessions and the BoJ conjured up 70 billion yen, waltzed in and bought some ETFs. Last month, the bank tweaked its ETF-buying program to indicate that while the annual target was scrapped, they reserved the right to intervene when necessary. Apparently, a selloff of more than 3% in a short timeframe counts as an excuse for direct intervention.
Those are your markets, folks. This is explicit and out in the open. So, while it’s perfectly justifiable to decry it and to suggest that, eventually, it will “end in tears,” in the meantime, this is reality — surreal though it may be.
Coming back to Albert, he’s not retiring, even though he could. I’ll let him tell you about it (excerpt below).
I simply can’t believe that I’m going to be 60 next week! Sweet 60 is the typical retirement age in the UK finance industry – so if I last the week, I will start to receive my company pension. But rest assured this is not goodbye. I want to let my long-standing (suffering) readers know that despite 39 years in finance I won’t be retiring yet. I feel I have so much more to give (some say too much). So I will be continuing to spread my own special form of good cheer for some time to come – or at the very least until the S&P falls back below the March 2009 lows of 666 as I have so doggedly promised it would. On that criteria I could be toiling on for quite a while.
Glad Albert is sticking around.