"The stupidity of people comes from having an answer for everything. The wisdom of the novel comes from having a question for everything."
- Milan Kundera
Last Week in Brief
Last week, a spike in equity market volatility sent stocks lower across the board. As investors contend with rising geopolitical tension, stocks have hit a lull. Leaving investors to consider heretofore trivial details like fundamentals.
You've heard the adage, "Sell in May and go away." This year, however, would have really cost you. As the S&P 500 has risen 4.20 percent these last three months. Moreover, closer scrutiny reveals that the period of seasonal weakness actually begins around August 1. Sell August one and go have fun... ? Not as catchy. But more effectual.
So, with current trend lines so strong, will seasonal weakness really take hold in August and September? Or will the stock market power through and continue making higher highs?
For now, we believe the market remains healthy. And we're likely in the Bull's final innings. Or the Big Melt-Up, as some call it. Either way, there's money to be made owning stocks. Regardless of recent performance.
Consider growth darling Facebook.
Up 680 percent over the last five years, Facebook looks and feels very overvalued. Yet, the forward price-to-earnings ratio is 32.10. Not cheap. But not the maniacal elevations about which its detractors often caterwaul. In fact, the price-earnings-to-growth ratio (PEG), a valuation metric that considers the stock's five-year earnings per share growth projections, stands at a reasonably attractive 1.19 percent. A PEG ratio of 1.00 or less is considered undervalued. So, from that perspective, one sees how the company could be palatable to buyers. Forecast, as it is, to grow earnings at 27 percent per year for the coming three-to-five years. Outstanding for a company with a market cap of $492B.
This is not a Facebook endorsement. But a contrarian view from the side of the fence that says, when everyone believes stocks are too expensive to buy, then they're most likely wrong.
And while those shouting about high market valuations will, eventually, be proven right, it makes little sense to sit on the sidelines until they're proven correct. As that could take some time.
Recently, former Fed Chair Alan "The Maestro" Greenspan said that he's more worried about the bond market that that for stocks. Explaining that equity bears hunting for excesses in the stock market may be better off worrying about bond prices. Which is where he believes the real bubble resides.
"By any measure, real long-term interest rates are much too low and therefore unsustainable," the former Federal chairman said. "When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace."
Of course, if and when such a bond bubble pops? It'll be bad for everyone.
Which leads to our final point.
Institutional strategist Larry Jeddeloh was recently in Iceland. Jeddloh, ever the astute observer, noticed that, much like it was in 2007, the Icelandic economy is booming. In 2007, it ended up serving as the global canary in the coalmine. Booming and busting prior to the rest of the world's having done so. Leaving the prescient Jeddeloh to wonder if Iceland may not represent a warrant on the global economy. One that is warning us, once again, that winter is coming. That global consumer spending, epitomized by the global tourism which Iceland specializes in, is topping.
The currency is too high. The banks are lending liberally. Tourism is bustling. Hotel and condo development abounds. But perhaps it is the build-up in tourist infrastructure to which we should be paying attending. There's a lot going on. And it's eerily reminiscent of 2007...
When Jeddeloh notices a shift in the tea leaves, we pay attention.
The number of doomsday prophets grows by the day. Even as the Dow has hit over 50 new highs since the election. Perhaps a reversal is in the offing. Last week's volatility certainly appeared like one was here. Yet, markets stabilized yet again.
A correction is coming. Sooner or later. Could be garden variety. Could be significantly more than that. Keep in mind, however, that bull markets can stay solvent longer than rational investors believe they should. In fact, the 1987 to 2000 bull lasted 4 years longer and saw another 100 percent gain from where today's bull market currently sits. Serving as a precedent for the idea that this bull market could have legs.
When the doomsday proselytizers forecast doom and gloom? Think twice before you buy they're tattered wares. As this market may have plenty left in the tank.
As for today's eclipse? Enjoy it. As you'll have to travel to Asia to witness another like it in our lifetime. And like watching C-Span, don't stare directly at it without proper protection.
Major indices finished lower last week. DJIA lost 0.84%. S&P 500 fell 0.65%. The Nasdaq receeded 0.64%. While small cap stocks lost 1.20%. 10-year Treasury bond yields rose slightly to 2.19%. Gold closed down $3.16 per ounce, or 0.25%.