Weekly Market Bites

end of week markets update

1) This week’s main market news was a prediction by Goldman Sachs strategists calling for a lost decade in the S&P500.

One thing’s for sure—it was a brilliant piece of marketing.

It was bear porn, drawing in all those convinced the market is: overpriced, overextended, inflated, manipulated, you name it.

It pissed-off all the bulls, who think market predictions are worth less than toilet paper, remember past forecasts (which all missed), and include the tech believers, optimists, and so on.

Putting this in context, the S&P500 has had decade-long annualized returns of 3% or lower only three times in the last 100 years:

The Great Depression, the stagflation of the 1970s, and the Great Financial Crisis.

Lets try to chew threw this in today’s bites.

2) Goldman Sachs, along with the bears, argue that U.S. equities are very expensive compared to history.

Their metric to measure this? The Cyclically Adjusted Price-to-Earnings ratio (CAPE) ratio.

The CAPE ratio measures how expensive/ cheap stocks are relative to their earnings. But instead of using just one year of earnings like a regular P/E ratio, it uses the average earnings from the past 10 years.

And YES, the US stock market today looks expensive compared to history.

The question for investors is who is right:

Bears: Mean reversion.

Bulls: This time is different (the most dangerous 4 letter phrase in investing). 

3) Lets hear the reactions from some of best people out there:

Jawad Mian over at Stray Reflections went one step further saying Goldman’s prediction was too optimistic.

Warren Pies at 3F Research released a great report arguing that while equities may seem expensive, stocks are actually fairly valued.

Why? Today’s S&P 500 companies are higher quality and more durable than those from 20 years ago, let alone earlier.

And our market Rabbi, Barry Ritholtz, over at The Big Picture, while more of an optimist, reminded us that a lot of these predictions are BS:

4) The 10-year treasury rate has gone up from 3.6% to ~4.25% since the Fed cut interest rates a few weeks back. Not great.

Check out the interesting take below:

5) And lastly, gold continues its unstoppable historic run.

charts

Talking about today’s S&P500 versus the past, take a look at this chart:

What do you think? Should today’s top companies trade with the same P/E as ExxonMobil, IBM, Phillip Morris, Shell, AT&T did 20-30 years ago?

And finally, some parting wisdom

On a personal note,

This week, I lost someone who was like family—one of my dad’s best friends. He was a man who helped instill in me from an early age one of the greatest lessons of life - how much friendships matter. Because the people we choose to share our lives with make all the difference. True friends give life its meaning.