The stock
market marched higher for the year even though US companies as a whole
did not become more valuable, just more expensive, as earnings failed to
grow from 2018 to 2019. Earnings are estimated to be up about 5% for 2020
(though these estimates are usually revised down as the year progresses).
If you look at the quality of this non-growth, then the rose-tinted
glasses of the average stock market investor quickly prove inadequate.
Corporate debt is up 5% in 2019, and a good chunk of
the increase went into stock buybacks. As stocks become more expensive
their benefit from earnings per share growth diminishes.
The US economy grew about 4% in 2019 – good news, except that our
national debt grew about 5.6%, or about $1.3 trillion;
our debt to GDP is over 100%; and paradoxically, the 10-year Treasury
yield dropped from 2.6% to 1.9%. Maybe not paradoxically: The Federal
Reserve went from a faint attempt of quantitative tightening (it did not
even raise rates, it just talked about raising them) starting in the
fourth quarter of 2018, which caused stock market to have a mini crash a
year ago, to quantitative easing in the second half of 2019, which
arguably caused the market to go up.
Just pause for a second, remove your gaze from the stock market, and
think: The Federal Reserve is easing (buying debt issued by the US
government, of which the Fed itself is an integral part) even as we are
in the tenth year of an economic expansion, at full employment, and
interest rates are already nearly at zero. What will the Fed do when we
actually go into recession?
Also, though the service economy (which is two-thirds of GDP) is growing,
our manufacturing economy has been in a recession for over a year.
Party like it’s 1999 – this was the theme of our IMA annual meeting. This
is how the stock market feels to us today. No, there are no dot-coms,
though temporarily we had dot-cannabis and dot-fake-beef bubbles which
got popped. Near zero interest rates, abundant liquidity, and a perceived
absence of risk (and fear) turn money into a crude instrument of bubble
creation. This is why the stock market is experiencing a lighter version
of the millennial lunacy.
Growth stocks are incredibly expensive. Value stocks have underperformed
growth stocks for the last ten years. The last time this underperformance
was this extreme was… wait for it… 1999.
Historically, value stocks have outperformed growth stocks by a
significant margin. But they have gone through painful bouts of
underperformance in the past.
|
|
|
No comments:
Post a Comment