Wherever You Go, There You Are

The market is expert at making prognosticators look foolish. Great Depression-era economist John Maynard Keynes, the primary architect of modern economics, once said “Markets can remain irrational longer than you can remain solvent”. It essentially means that the market has a mind of its own. It is more than willing to go up or down in the short or even medium term, without regard for what it ‘should’ do.

The S&P 500 Index is back above 4400 this week, the highest level since April of 2022, (when the index rolling over in a bad year for the stock market) and only a few percentage points from an all-time high. Based on that fact, one would think things must look pretty good compared to April of 2022. In reality, not so much. Here is a look at some data from now and then.

      • The trailing 12-month P/E ratio is currently higher at 25.6X, vs. 21.6X in 2002.
      • The forward P/E, based on consensus earnings are essentially the same at 18.5X.
      • The yield on the 10-year Treasury is almost 1% higher than in 2002, which would imply lower valuations
      • CPI is significantly lower than in April of 2022, and that’s a very good thing.
      • Core CPI (excluding food and energy) is also lower, but not by much, and that’s not a good thing.
      • The GDP forecast for 2023 is way down from 2022.
      • The Conference Board Index of Leading Indicators, is also much lower.
      • The unemployment rate has barely budged and the Labor Force Participation rate has inched up close to pre-pandemic levels.

Back in late 2021 and into 2022, the market was seen as ‘priced to perfection’ and today the market is apparently a bargain. Go figure.

What is clearly different, and is not listed on the table, is Artificial Intelligence (AI). AI has triggered the mega-cap technology stock rally and if you look under the hood, it has been the dominant driver of the S&P index rally to date. Is AI worth it? Only time will tell, but it does hold promise of huge productivity gains. Productivity growth is a requirement if we are to dig our way out of the debt/economic hole we are in so the optimism is understandable. On the other hand, even if AI does produce those gains, it’s very unlikely to do so in the next 6 months and of course there are costs associated with AI to get ramped up. Is the market overdoing it? At the moment, probably, but that doesn’t stop the market from being optimistic. Markets can remain irrational longer than you can remain solvent.

This is a classic example of why market timing is so difficult and why we stay invested. Our portfolios will make tactical shifts to maintain risk balance, but in general, we are always invested.

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By: Adam