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1/ A new thread on market valuations, economic data, commodities, small caps, & other factors. For many metrics, the current euphoria continues to match the 1929 & 2000 peaks. Mikhail Samonov's latest data shows this is the worst drawdown for long/short US value in 200 years.
2/ Growth stocks haven't just noticeably outperformed value in the US since the GFC, they've done the same around the world (source Pictet AM).
3/ This has left global quality and growth equities sporting a median P/E ratio that easily tops the year 2000 high (source Societe Generale).
4/ Back in the US, the historic boom for growth stocks is impacting the IPO market too. On a proceeds-weighted basis, the average first-day return for IPOs in Q3 of 2020 almost matched the final year of the Dotcom boom (source Prof Jay Ritter).
5/ The number of US stocks that have been up over 400% at some stage during the first 9 months of 2020, also neared the Dotcom pinnacle. The kicker is that today the total number of US-listed companies is dramatically lower than it was in 2000 (source Factset).
6/ The US is in the midst of one of the most expensive equity bubbles on record. On a P/E, EV/sales, EV/EBITDA, P/B, as well as other recognized bases, US markets are currently valued at extremes that usually occur only once or twice a century (source Goldman Sachs).
7/ On top of that, there's data suggesting US household allocations to stocks have now surpassed anything seen in at least 70 years (source Jesse Felder).
8/ As one recent financial commentary wryly pointed out - new bull markets are unlikely to start when market cap/GDP levels are near, or breaking out to, fresh all-time highs (source Bianco Research).
9/ This is true of US consumer confidence as well. It bottomed close to (or far below) the 60-point mark after the Dotcom & GFC crashes. It correlates well with the onset of a new bull & during no recession in 50+ years has it troughed at so high a level (source Emil Kalinowski).
10/ Some say near-zero rates will boost stocks. They forget Japan (then the world's 2nd largest economy) tried this in '01 & the EU (the world's biggest trading bloc) did essentially the same post-GFC. Both are still waiting for an imminent multiple lift-off (source Yardeni).
11/ US markets don't just need to reckon with historically extreme valuation levels, they're also facing a high risk public health scenario & a bloated economic foundation. Europe and the US now seem to be facing a big 2nd COVID wave. Far larger than the first (source FT).
12/ It's reminiscent of the 1918 Spanish Flu, which had a huge & deadly 2nd wave (during Nov/Dec). Even if a high 2nd wave death toll can be avoided this time, fresh lockdowns will likely do serious damage to the fragile global economic recovery (source JSUdotEDU).
13/ As things stand, the worldwide economic recovery has for the most part only reached levels below where things were 9 months ago. Most economies had already started plateauing in a sub-normal range before the now-unfolding 2nd wave started to hit (source Bloomberg).
14/ The combination of a sizeable 2nd wave & incomplete global economic recovery could be the knockout punch for this US bull market. The ILO estimated 500m jobs were lost globally in Q2. Permanent job losses in the US are already above Dotcom crash levels (source Daily Shot).
15/ If interest rates weren't already very low or near zero across most major economies and government debt-to-GDP levels weren't at their worst point globally in over 100 years, these major concerns would be easier to manage (source FT).
16/ The truth is that the 2 key levers - interest rates & govt debt capacity - usually used for fixing economic crises, are already stretched well past the point of responsibility. In the US, budget deficits like this haven't been seen since the height of WW2 (source Bloomberg).
17/ Fallen angel volumes (investment-grade corporate debt that's been downgraded to junk) in the US & globally, have already shot way past the apex of both the Dotcom & GFC crashes. All this before the 2nd COVID wave has truly hit & new lockdowns start to bite (source JPM).
18/ In short, options are limited. Especially for US markets, given how overvalued the majority of those equities are. The US CBO estimates debt-to-GDP will rise swiftly until 2045. Last time this happened between 1930 & 1945, inflation rose sharply (source Fidelity).
19/ This inflation from 1930 on, coincides with the start of the last great resource bull market which drove commodities & inflation upwards until 1980. It unfortunately also roughly marks the start of the biggest US equity crash in history & the Depression (source Daily Shot).
20/ One notable fact is that each major commodity & inflation trough in the past 200+ years has been followed by a US depression, rapid commodity price rises, & high inflation (see previous image). Still, it's not all doom & gloom. Emerging markets look attractive (source GMO).
21/ Value is cheap in the US, as the image at the top of this thread shows. Small caps in the US also seem headed for outperformance, after having been on a tough run since the GFC. Growthy, tech-darling large caps should probably be avoided like the plague (source Scotiabank).
22/ Further research buttresses the data showing commodity prices are at (or near) generational lows. According to GMO, resource stocks have never been this cheap relative to the S&P500. Especially in the energy and metal sectors (source GMO).
23/ Finally, recent analysis from Matthias Hanauer ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3705218) reinforces the idea that the value/growth spread in EMs & DMs ex-US is at its widest point in decades. The last time EM value appeared this cheap was right before the epic '00 to '08 commodity boom.
24/ Previous threads on market valuations, economic data, and other topics, can be found here.... https://twitter.com/ajc_79/status/1293295239575339008
25/ And here. https://twitter.com/ajc_79/status/1276594890802180096
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