Equities
Data Source: ETF.com, Morningstar, & Refinitiv
The third quarter stock market performance can best be characterized as “speculative”.
The best performing stocks this quarter in the above table were the Russell 2000 small cap index and small cap “value” stocks.
Interestingly enough, these are also the only indices listed here that have both a below average earnings yield AND a below average earnings growth rate over the last few years (above average is in bold). They are both highlighted in yellow.
As an aside, it seems odd that stocks with such a low earnings yield would be classified as “value”.
The third best performing set of stocks (small growth) has a 0.96% earnings yield. As you can see that is the lowest earnings yield in our table.
While the stock market leaders in 2023-2024 were the Magnificent Seven, the new leaders since the April low have been unprofitable tech companies.
Source: ZeroHedge
Here are a couple of recent tidbits from Bespoke:
Putting this in layman’s terms, this is the equivalent of paying $100,000 for a local dry cleaner which has generated $269 in sales over the last 12 months.
That seems pricey to us.
Apparently, many people feel otherwise.
Here is a list of the best performing stocks since the April 8 low:
Fourteen out of the best fifteen performing stocks are of companies that lose money.
Where is the money coming from to propel all these speculative stocks to such stratospheric levels?
Over the last 30 years, the only time you saw high quality stocks underperform the market to such a degree was during the last year of the dot com bubble.
This is only one example of dozens of 1999 analogs that are popping up on our radar.
As you can see, when tech stocks’ valuations got this stretched in the dot com era, they did go even higher for a few months.
But not for years.
And all those gains in the NASDAQ 100 from 1996 onwards were given back.
The stock market is very pricey. Here is a sample of some valuation indicators:
Most of these tried-and-true indicators are at an all-time high.
The rest are trading at their 98th and 99th percentiles.
When the stock market is expensive (and it is now), what stocks have traditionally fared the best going forward?
When the stock market is expensive, value stocks have had the best performing forward returns by a wide margin. Profitable stocks and dividend paying stocks performed great.
Large cap leveraged growth did not fare as well.
Now between “the stock market is highly overvalued” and when value stocks start to actually outperform…the speculative stocks can do very well for months.
We saw this in 1999 and early 2000.
But history suggests that all those outperformance gains the speculative stocks make will be given back and plenty more.
debt
Data Source: FRED
T-bills remain one of the few United States assets that is undervalued relative to historical measures.
But with the Fed expected to continue cutting interest rates, the undervaluation gap will likely be reduced significantly over coming months.
Despite all the talk of interest rates being so high that people can’t afford to buy homes, long-term interest rates are below average on both nominal and inflation-adjusted terms.
Real Estate
Recent Data Source: NCREIF
The 4.81% cap rate is how much income return a typical commercial real estate investor has made over the last 12 months. It does not include the price appreciation of the investment.
Like most assets in the United States, real estate is overvalued.
Since its inception, the real estate futures market has been extremely effective in forecasting future real estate moves. It is currently calling for a 1.21% annualized return in price appreciation over the next 4.3 years.
If you combine the 4.8% cap rate with a 1.2% price appreciation, you are looking at roughly a 6% total return.
But if real estate is overvalued, why isn’t the futures market predicting a crash?
After the 2008 financial crisis, the government imposed more severe lending requirements on banks.
Source: The Market Ear
A common theme in many financial crises is overuse of leverage. As you can see, back in 2008-2012, real estate investors were leveraged to the hilt.
Now? Real estate investors are close to the most UNLEVERAGED they have been since the 1950’s.
This is a big reason why the real estate futures market is more optimistic than it was in 2006.
Commodities
Let’s cut to the chase and show a few charts of the commodity which has captured many people’s attention- gold.
Source: Guru Focus
The only time the inflation adjusted price of gold has been anything close to where it is now was on January 21, 1980. That date marked the end of the great 1970’s gold bull market. From there, gold proceeded to go down 70% in a 19-year bear market.
Here is another chart where gold is at January 1980 levels.
It is interesting to note that from January 21, 1980, the S&P 500 went up 25% over the next 10 months before rolling over into a bear market.
And one more:
Ninety-three hours of work seems like a lot of effort to buy one ounce of a shiny metal.