US stocks in rarefied air
Let’s see … the dividend yield on the S&P 500 is down to 1.25% … Nvidia has breached $4T in market cap … Palantir is trading at over 82 times sales … (sales!) … are stocks expensive?
We can invert the dividend yield to look at it in more familiar terms like price to earnings, price to book, price to sales. A 1.25% yield is equivalent to a price to dividend ratio of 80.
This figure also happens to reflect the US market as a whole. The total market fund VTI yields 1.22%. Adding back in its 0.03% expense ratio gives us the same 1.25% as we have for the S&P. CNBC points out that this is near the all time record low. No matter how you slice it, that’s rarefied air.
How about the rest of the world? Applying the same process to the ex-US total market fund VXUS, we add back in the expense ratio of 0.05% to a fund yield of 2.83% to find the world market ex-US yields 2.88%. That’s a price to dividend ratio of 34.72. The US market again looks very expensive at 80.
Valuations aren’t a very good near term predictor of returns, but over the longer term they’re hard to beat. The US market yielded in the low 1% range in March of 2000. It yielded in the low 4% range in March of 2009. Suffice it to say returns of the next ten years after March 2000 (annualized -0.9%) paled in comparison to the next ten years after March 2009 (annualized 14.58%). Investors who had the misplaced faith to own exclusively US stocks for those first ten years were rewarded with a 9% loss of their dollar capital. In real terms, the loss was substantially greater.
Meantime in Blighty
https://www.youtube.com/watch?v=Zdc6MHlTOTQ
Is Reeves onto something? The deregulation talk sounds promising …
Britain cannot grow without ‘fighting fit’ finance sector, Rachel Reeves says
We are definitely in bubble territory. I have massively reduced exposure to stocks.
Regarding the Reeves speech, the key takeaway for me is this, “the Chancellor said new powers to mandate pension funds to invest in UK assets were “sending a clear signal” that the Government and industry want to deliver higher returns for savers and more investment for the economy.”
The above is the type of financial repression highlighted by Russell Napier
in this article where he predicted exactly the above. I think UK pensions have some of the largest holdings outside of its domestic economy of any large economy.
“https://themarket.ch/interview/russell-napier-we-are-entering-a-time-of-financial-repression-ld.4628”
Based on the latest UK government policy papers, inward investment will be driven massively towards military spending, intelligence and security. I guess green policies will fit in with this to wean the UK off dependence on foreign energy.
As an aside Russell also predicted inflation as measured by governments would stick around 4%….The UK inflation rate “unexpectedly” rose to 3.6% this month….
Ahhh … the part about mandating pension fund investments isn’t exactly deregulation. It doesn’t send an encouraging signal either; if the government has to require investment in something, why aren’t people investing enough on their own?
Because we are moving towards a war economy.
With regards to the deregulation, a lot of it is aimed at decreasing capital requirements for banks, and increasing the ratios that can be lent for mortgages from 3x salary to 4.5 x salary.
We have a huge housing issue here, I have no idea how this will help the supply issue.
There’s just so much capital to go around. I mean real capital, not fiat capital. Similar thing happening here. One of my pet themes is that every unit of purchasing power spent by (or controlled by) government is lost somewhere else.
When government spends more than it takes in, it has to borrow the difference. These borrowings are lost to the private sector. Of course the banking system can conjure up more fiat to borrow, but this just shifts the cost from the debt market to the currency market. The currency loses value and prices rise.
The housing market is getting hammered by both. It costs more to borrow and the borrowed money doesn’t go as far.
Net-net, the housing market is one of the most conspicuous areas where people are losing purchasing power. Government is taking it, much of it going to war.
Summers Warns of ‘Massive Inflation Psychology’ From Trump Rates
“I’m not aware of any economist anywhere near the mainstream who is supporting anything like 1% rates in the current environment,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. Such a move “might create some temporary boom in the economy, but would do so at the cost of a massive inflation psychology.”
Summers is correct. But where such voices when the Fed did this in 2020-2021?