Valuation

Sometimes it’s hard to keep up. For weeks and weeks, everything was locked down, it was easy to know what was going on: baking, Netflix and yoga. Now, it’s all change, hence revved up economists talking about the intoxicating cocktail of monetary and fiscal stimulus and the unlikely post-recession starting point of surging consumer net worth. Hence Madison Square gardens is opening up earlier than expected, and the subway in NYC is restoring some overnight services. Movie theatres are giving the carpet a quick hoover, so too restaurants; and Las Vegas casinos are set to resume 24/7 operations in a matter of weeks. Bookings for time out the house, as per recent comments from the CEO of Royal Caribbean Cruises, are stacking up. It’s very apparent: no more baking. And against a backdrop of reopening, there comes down the expressway another trillion plus stimulus package. At the low end, this will add a thick layer of marzipan to some already well baked near-term growth forecasts – think a +7% for 2021. At the top end, try a red hot 9%. Anything is possible. Add in the $3 trillion in excess savings swimming around on deposit and it’s no wonder the likes of Larry Summers are getting a bit goosed. Powell played a dovish hand in front of his Zoom call this week, but there are bulbs flashing. The CAPE smoothed P/E multiple has expanded for six straight months and is tickling an eye popping 35x, higher than both March 2001 and September 1929. Read up on margin debt, positioning, and loss-making IPOs haring 100% higher in a matter of months and the taste quickly turns a tad tart. Yes economies are opening up, but what’s in the price? There is no question there remains upside in many sectors, from select leisure, retail and healthcare names; but swathes of the market are, largely, all tracked out. Hence, the lavish opportunity for active stock pickers who run concentrated funds, and who don’t have to buy the market on a 35x CAPE. As yields continue to grind higher, valuation is likely to matter more and more.