Don’t Look Down

This time is different.

As ever, those four words are very dangerous when arranged in that order and applied to markets.

But in the current context, the danger emanates not from the notion that this time is never different, but rather from the distinct possibility that it is. “The starting point for this cycle is very different,” Goldman’s Peter Oppenheimer and Sharon Bell wrote, in a new note. “Interest rates are at record low levels, leaving less room for valuations to increase; margins are at record high levels, with more cost pressures constraining further increases; and valuations are high, particularly in the US.”

I’m not one for brevity (as regular readers will attest), but while perusing Goldman’s latest cycle musings, I ran across two tidbits that I judged to be worth highlighting briefly, even as I don’t have anything particularly profound to say about them, mostly because they speak for themselves, one of which loudly so.

The figure on the left (below) shows the ratio of public market capitalization to global GDP. It’s now pushing 140%, around 20 percentage points higher than peaks seen just prior to the dot-com bust and the financial crisis.

In itself, that doesn’t necessarily portend doom, let alone an imminent calamity, but I suppose I’d ask readers to consider the steepness of the climb over the past two years.

The timeframe Goldman uses (some eight decades) compresses the chart, thereby making rapid increases appear even more dramatic than they are. And the ratio is skewed by the juxtaposition between an engineered global depression and a policy-driven surge in equity prices. Caveats aside, the vertical ascent is positively breathtaking. Goldman sees a modest decline in 2022 (orange dot on the visual) but that would still leave global stocks at 120% of GDP, far higher than any point in recorded history outside of the pandemic.

The figure on the right (above) shows that during Fed tightening cycles, equity upside depends on earnings growth. Multiples compress. Currently, valuations are stretched in the US, and the outlook for profits is clouded by gale-force margin headwinds including, but not limited to, soaring input costs and rising wage bills. If growth decelerates, the fiscal impulse falls away and the consumer falters, it won’t be easy to pass those costs along, assuming it’s possible at all.

To be clear, Goldman isn’t bearish. I wouldn’t want to convey that. My aim here wasn’t to summarize the bank’s 19-page missive or even to capture the gist of it. Rather, I merely wanted to highlight a pair of visuals which stuck out to me.

“Remarkably, despite the pandemic, 2021 ended the best three- and five-year periods since the Tech bubble of the late 1990s and one of the strongest in the last century,” the bank’s Oppenheimer remarked.

That’s a tough act to follow.