In case you've been asleep under a rock lately, let me catch you up: Markets are in the midst of an epic bubble that is being ignored by investors at their peril.
At 21x GAAP earnings (which are inflated by low interest rates, low corporate tax rates, and sluggish wage growth), the S&P 500 is trading just below the 24x PE it reached during the Internet Bubble. The S&P 500 rose 9.5% last year without profits increasing for the second year in a row. The index hasn't seen a decline of 1% or more in 84 consecutive trading sessions, a feat last seen in 2006 and before that in 1996. If investing were really this easy, everyone would be rich.
But sadly, all of this is an illusion and it is going to end badly – very badly.
Especially for companies like these two.
If You Really Believe This Market Is Going to Keep Rising, You're a Turkey
The bond markets are deep in la la land with trillions of dollars of paper trading at minuscule or even negative yields (right now the number is $4 trillion of negative-yielding paper, down from $14 trillion last year). This is the result of central banks fighting a debt crisis by printing tens of trillions of dollars more debt, governments abandoning fiscal policy, and citizens allowing this mess to fester. People should heed the lesson of the Meleagris gallapavo, otherwise known as the North American turkey. The turkey has a great life for 364 days of the year until Thanksgiving comes along, and then one awful day when it its head gets chopped off. That is likely to be the fate of complacent investors who seem to believe markets can keep rising without any relationship to economic fundamentals. I take no pleasure in assuring them that is not the case. There are no free meals in this life, and those who try to get away with skipping out on the check end up with serious indigestion.
Last week, of course, stocks hit new record highs after President Trump promised a spectacular tax plan. How do we know it will be spectacular? Because he said so! Never mind that it will take months to pass the plan and the specifics are unknown. Trust me, it is going to be fabulous! Markets certainly believed the president. The Dow Jones Industrial Average rose by 0.99% to a new closing high of 20,269.37, while the S&P 500 jumped another 0.81% to end the week at a record 2,316.10. The Nasdaq Composite Index added 1.19% to a record 5,734.13. We are told that these moves are supported by higher corporate earnings, but from where I sit, 2016 S&P 500 GAAP earnings are no higher than $110 (again, inflated by low taxes, low interest rates, and low wages), so that is a bunch of baloney. The market is trading at 21x trailing and inflated GAAP earnings, and that spells B-U-B-B-L-E to me.
The yield on the benchmar…
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.