With Friday’s selloff, it will be interesting to see if this week brings a pause to the equity run-up. The rise has been dramatic with most US indices up 12% to 14% this year and over 20% since the November lows. I was struck by the last market pause in May and the comments on the US business TV shows. One said that there was a wall of money on the sidelines waiting to buy on the dip. Institutional money desperate for yield and company’s filling buy back programmes do seem to provide this market with a floor.
Historical multiples such as the TTM PE and the PE 10 at 18.85 and 23.89 at the end of May for the Dow are high relative to the historical averages of 15.5 and 16.47 respectively. However given the flood of money printing at Central Banks around the world such levels are not surprising nor excessive. I don’t think we are in bubble territory yet but, given the lack of alternatives for money, we will likely end up there. Whether that takes another 6 or 12 or 24 months is not really important. In cases where risk premia is irrational, a quote from Jim Leitner in “The Invisible Hands” comes to mind where he advises that an investor should focus on “the possibility of buying cheap insurance when the market is willing to sell it, before the horse has left the barn“. It seems to me as this is such a time and I will be looking for such opportunities in the absence of a major pull back. In my mind, its better to spend some profit to give peace of mind whilst also participating in further run-ups.
Longer term, I am disturbed by the macro policies currently been pursued and the impact that an exit from QE may have. It makes little sense to respond to every crisis with loose monetary policy designed to reinflate asset values so that Western consumers can get back to the Mall. I thought our response was going to be more fundamental this time! On that subject, I noticed a review of a book in the Sundays – its called “When the money runs out, the end of western influence” by the HSBC economist Stephen King. The review was just okay although the Economist seems to have given it a better one. Cheery reading for the holidays!