There has been distinct cognitive dissonance between Bloomberg’s two more prominent market commentators in recent weeks: on one hand, Bloomberg’s Richard Breslow has been growing increasingly frustrated with the “noise” in capital markets and the inability of traders to form a clear thesis, instead flip-flopping from day to day based on whatever the prevailing narrative of the past 24 hours (or minutes) is; on the other Mark Cudmore, who after starting the year off with a clear bearish bent, has become increasingly more bullish, at times dogmatically so, and his latest note released overnight does little to change the divergence.
Writing in “Stocks Have Upside as Value Is a Subjective Measure” Cudmore claims that “too many investors seem obsessed with the fact that U.S. stocks are “expensive” and “overvalued” when compared to historical metrics”, something we showed over the weekend based on a BofA table which demonstrated that stocks are overvalued on 18 of 20 metrics…
… and instead claims that “value is a subjective assessment seems to have been forgotten. As a result, U.S. equities are more likely to melt-up rather than melt-down in the short-term.” As a result, his contention is that even with the S&P trading at 2,400, and potentially set to make new record highs today, “U.S. equities are more likely to melt-up rather than melt-down in the short-term” conf
We leave it up to readers to agree or disagree with the former portfolio manager.
His latest Macro View titled is presented below.
Stocks Have Upside as Value Is a Subjective Measure
The truism that value is a subjective assessment seems to have been forgotten. As a result, U.S. equities are more likely to melt-up rather than melt-down in the short-term.
Too many investors seem obsessed with the fact that U.S. stocks are “expensive” and “overvalued” when compared to historical metrics.
I’m not disputing those statements. But when there’s an unprecedented amount of liquidity in global markets, then valuations at unprecedented levels don’t seem completely illogical.
Value can’t be adequately compared in nominal terms. Real terms are what matter. If two people are stranded on a desert island and one has some food while the other has gold but nothing else, then she will exchange all that gold for some food. At that point in time, that value is correct, no matter what historical data suggests.
It’s hard to consider valuations stretched when there’s still excess cash on the sideline. I’ve noticed that perma-bears tend to bemoan that central banks are distorting markets while simultaneously failing to incorporate that “distortion” into their valuation metrics. They can’t profitably have it both ways. Either central banks have not changed the game and the bearish historical models will work, or central banks have altered market dynamics, in which there’s no point referencing rules to the old game as an excuse to sell.
I know which camp I’m in. Global liquidity is abundant and constantly increasing. Central bank balance sheets have been accelerating in size since the start of 2016, not decelerating.
Taking the combined balance sheets of just the four largest central banks in the world (PBOC, ECB, Fed and BOJ) and charting that versus the market capitalization of global equity markets shows no dislocation in broad equity prices.
If anything, this suggests that global equities are “undervalued” as normally they trade at a premium to those balance sheets. And I stress that I’m only charting central bank balance sheets against the entire world’s equity markets.
When you add in the fact that global growth is picking up, global earnings are incredibly strong and long-term yields remain contained, then it’s hard not see this Goldilocks world for equities persisting.
I will acknowledge that this argument focuses on global equities rather than U.S. stocks. I’m firmly in the camp that U.S. equities may underperform other markets, particularly EM ones, for many years ahead.
So how can I say that U.S. equities are at risk of melting up? Because too many investors are fighting reality and using U.S. equities to express a misguided bearish global view. U.S. political noise provides an extra excuse.
This is the macro backdrop. Corrections are obviously possible. But, until the framework shifts again, I’m failing to see why dip-buyers aren’t correct.