Summer Vacation 2016 Investment Asset-Class Rethink: A 3-Part Series

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US stocks are at new Highs and Record Valuations

Are You Bullish, Bearish or Confused?

The media is reporting that the stock market is trading at just 17 times next year’s estimated earnings. Many in the stock-buying business will tell you stocks are a “good” buy. Here are their reasons:

  • Interest rates are near 0% which means there is no alternative to stocks.
  • The dividend yield of the S&P 500 is about 2%.
  • The stock market always goes up over time.

Yes, but…….

  • There is Always a Business Cycle, and We Are Near the End of One Now

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  • History Shows Buying Stocks at these Valuations Project Low Returns and High Riskcondensed shiller
  • Interest Rates Are At Record Lows – But Why?tenyear

Interest rates are at their lowest point ever. Stock dividends appear to be a strong competitive value. Consider, however, the reason interest rates are at record lows. It isn’t good. Central banks everywhere are forcing rates down to prevent a global depression.

The average stock is at its highest valuation EVER which doesn’t match up with the fact that S&P 500 earnings haven’t increased since 2012!

Stagnant earnings and expensive valuations with the backdrop of the risk of a global depression, seem like good reasons to be cautious about putting money to work i.e. not rushing to buy.

We think investors should explore the disconnect. After 4 years of stagnant earnings, why do stock prices continue to climb higher and higher?

  • Are Dividend Stocks Basically Safe?

One big investment theme this year is dividend stocks. Many stocks are yielding around twice the interest rate of the 10-Year Treasury Bond, which is a good argument to own them. But the valuations of these stocks are now really expensive. Are ultra-low rates an opportunity for these stocks, or an indication of the risk of a financial depression? That is the question. Don’t be deceived that dividend paying stocks are “safe”. In 2008, dividend paying stocks were down nearly the same as the S&P 500, that is to say, negative 50% at one point.

Buying expensive stocks, dividend payers or not, becomes hazardous to your wealth at some point. From our perspective, the current environment of unresolved global risks, very high equity valuations and growing pressure on profit margins, means cash has a very strong chance of being a better asset. Not only will cash hold its value in a correction but having liquidity available to buy at lower prices is an underrated way to actually make money!

In our next installment of “The Summer Vacation Investment Asset-Class Rethink”, we take a look at the most widely owned financial asset of all, the bond market.

Peter Quigley

Renvyle Partners LLC

 

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