Talking Points – August 2021

August 25, 2021 – What is Expensive?

The past few years and even the past decade, have seen most asset prices increase significantly. Prices have increased so much that many investors are worried about valuation. To be fair, many of these same investors have been worried about valuation for years.

We can see in our first chart, that the average price-to-earnings for stocks so far this decade is the highest since the S&P 500 was created.

Source for all charts: Strategas Research

If we were to come up with a comparable valuation metric for houses, it would also show record valuation levels.

Why are valuations so high and yet potentially justified? The exceptionally low level in interest rates, which when looked at in a valuation perspective below are by far the most expensive major asset class right now.

There are always many factors that effect asset prices at any given time. However, the path of interest rates in the years ahead will go a long ways to determining returns for stocks, housing and other assets.

August 18, 2021 – Large Cap Masking Trouble in Growth Stocks

The broader market and growth indices continue to trade near all-time highs. However, the price increases in mega-caps, such as Apple and Google are masking weakness in the small cap growth segment. In fact, small cap value has actually been outperforming.

Source: Strategas Research

This weakness in small caps has contributed to the worsening overall market breadth that can sometimes raise a caution flag to the market. It is possible, what is happening now in the speculative areas of the market like IPO’s and SPAC’s are coming back to earth. 

August 11, 2021 – Full Recovery and Room To Run

Plenty of year-over-year economic data is very distorted and hard to analyze at this time due to the economy being shutdown last year and reopening this year. However, our first chart simply looks at total GDP and shows that we have now surpassed levels from pre-pandemic for a full recovery in absolute terms.

Source: Truist IAG

Even with this recovery matching the strongest in history, it might still have much further to run in terms of time. The next chart, indicates the current period of growth may only be getting started compared to past recoveries.

This has obviously been a unique period due to COVID and its various repercussions. How it affects the recovery in the quarters ahead is unknown, but if history is any indication there could still be room to run in the economic recovery.

August 4, 2021 – An Unsustainable Gap

The housing market has been on a massive run. That is likely not breaking news to anyone. What might be more eye opening is our chart today showing how far stretched housing prices (purple line) have become compared to the rise in wages (black line).

The housing market is in a much different spot now than the last peak. Inventory is extremely low, and more importantly, low mortgage rates are helping with affordability. Even with these characteristics, it seems logical that in the quarters and years ahead these two lines will need to find a way to converge.

Source: Greg Towner, CFA, CMT