At this very moment, the U.S. is leading a global economic resurgence. This on the backs of a gradually improving economy, domestic energy resurgence, healthy banking institutions, and a better-late-than-never jobs market.
The U.S. economy continues to strengthen. Albeit, at a painfully slow pace. Yet, when compared with other regions across the globe, the U.S. looks peachy.
U.S. manufacturing production is 2.9 percent above its 2007 peak. While European powerhouse Germany remains 4.1% below its 2008 peak.
U.S. auto sales rose 6.2 percent year over year, even as Chinese auto sales have slowed to 5.2%, having declined for six months.
Seven major chemical plants will see construction completed in the U.S. by 2017, as global firms attempt to benefit by the surplus of inexpensive American natural gas.
German manufacturing is down, as is GDP. And last week's problems regarding a large Portuguese bank only served to remind us of the inherent weakness within European banks.
The media, having spent most of 2009 through 2011 terrifying everyone with tales of the financial abyss, is now all too happy to jump aboard and espouse the improving economic situation. Much to the detriment of investors.
Equity performance is not driven by current economic data, that being already priced into today's prices. The equity markets are a direct bet on the future performance of the U.S. economy, and so the companies operating therein. How much revenues will contribute to what type of profits, which will ultimately determine the growth in earnings per share.
Six years into this most hated of bull markets, investors remain under invested in stocks. Data shows that investors, both individual and institutional, are well under weighted stocks relative to their 2007 allocations.
Yet again, we bear witness to the same drama that has played out repeatedly since man first risked capital in hopes of earning a return.
In 2009, the stock market offered a once-, maybe twice-in-a-lifetime opportunity to buy great assets at distressed prices. Share prices always overshoot intrinsic value in bull and bear markets. At the height of the credit crisis, investors dragged markets down to unreasonable lows.
Next, as markets smoldered and media pundits scared the hell out of anyone listening, investor psychology kicked in. So leaving shell-shocked investors to sit on the sidelines as stocks rocketed off the March lows and shot up 30 percent in 2009. Only to continue this historic climb for five straight years. A period that has seen the Dow, the S&P 500 and the Nasdaq achieve multiple record highs. Even as Main Street largely sat on the sidelines.
Today, the media sings of the improving fortunes of the U.S. economy. Considering that most Americans receive their news from Diane Sawyer, Robin Roberts and Bill O'Reilly and Rachel Maddow, we are increasingly sanguine about the nation's financial stead. If only the media wasn't the perfect lagging indicator.
Americans have a predilection for believing whatever is said on television. For investors, this serves as an Achilles heel. Because the media, while appearing reverential, has less an understanding of markets than the rest of us. Flaubert said that there is no truth, there is only perception. And our perception of the jabbering punditocracy is more than it deserves.
Consider the background of the average journalist.
Journalism school. Blogger. Broadcast editor. Newspaper reporter. Website producer. Then, one day? Big break. Suddenly Johnny Journalist is telling you how to view the world. And often, we consumers are all too eager to agree, sine dubitatione.
These are not traders, investors, speculators, financial academics or economists. To the media, the market oft resembles quantum mechanics. Of course, that rarely prevents it from prattering on aimlessly about that which it hardly grasps.
Which brings us to today.
Currently, the media is underscoring how rosy things are. Which brings investors to conclude that it is safe to reenter the markets. Though the new record highs have been achieved. And U.S. stock valuations have become pricey.
The trailing twelve-month P/E on the S&P 500 is 19.6, well above historical averages. The cyclically adjusted P/E (CAPE) ratio, or Schiller's P/E, sits at 26.18 - anything over 25 is considered meaningfully overvalued. In fact, the U.S. CAPE ratio places domestic stocks as the 51st most expensive of the 54 liquid global markets.
Historically, stocks of any nation purchased above a CAPE ratio of 25 have performed poorly over the following three-, five- and ten-year periods. Of course, the mainstream media would never comprehend nor mention as much.
Fight Club author and New York Times best seller Chuck Palahniuk has said, "If you watch closely, history does nothing but repeat itself."
Thus, here were go again.
We would not describe the current market as frothy. Nor would we subscribe to the bubble-ology used so thoughtlessly these days. Still, the facts speak for themselves.
The major equity indices have pushed to record highs this year. And institutional buyers are beginning to say that the rally's end is nigh. Just as individual investors begin piling in.
Bloomberg data shows that $100 billion has been added to equity mutual funds in the past year. Ten times more than the previous twelve months.
Do you truly believe that an investing public, having been only recently goaded from its shell, is not being set up for yet another painful lesson on the callous and impersonal nature of markets?
Our team believes that value can be found. But, one must know where to look.
Foreign markets that have comprised apocalyptic headlines the last few years trade at CAPE ratios representing dramatic discounts to U.S. valuations.
Small- and mid-cap companies involved in the unconventional drilling revolution, especially those providing the "picks, pans and shovels" for this modern day gold rush. These largely unknown firm could represent tomorrow's energy behemoths.
Finally, consider those most-detested areas of the market. Those that have been avoided like plague these last five years. These spaces will provide excellent opportunities for those willing to flip rocks and do the research.
Sometime in 2015, the Fed will begin to unravel the trillions of dollars in quantitative easing that have been injected into global markets. At that time, indices will likely be at, or lingering near, new highs. The public will likely have been lulled into the morphine-drip mentality that stock prices can only rise.
There lay the danger.
Having missed the majority of the last six years, investors will be piling in. Right as the Fed pulls the intravenous tubes. Shuts off the respirator. And the patient, having spent six years on life support, lay in bed as the doctors look on. Wondering if, when left with nothing but his own devices, the patient can even survive the day.