Janet Yellen says "secular stagnation" is a potential concern for the Fed. Here's what that means, and why it matters to policy.» Read More
It doesn't matter how you slice it—stocks are getting more expensive. But as markets continue to rise, few investors see cause to ring the alarm bell.
Many market participants seek to measure the attractiveness of stocks by using the price-to-earnings (P/E) ratio, which divides the price of stocks by expected earnings. As of Friday's close, that reading was above 17, just about the highest since mid-2004. This as stocks have been rising over the course of the year even as actual and expected earnings decline.
There are many other ways to value the market as well. But no matter the metric, if "price" is in the numerator, it is likely to look high.
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Take the price-to-sales ratio, for instance. It has risen to 1.8, the highest since the early 2000s, according to FactSet. And in a chart making the rounds on Wall Street, Ned Davis Research points out that the price-to-sales ratio for the median stock in the S&P 500 has risen to the highest value ever (using a data set going back to 1964).
A glance at price-to-book ratios yields a similar conclusion. Tobin's "Q ratio" divides the market price of stocks by total asset value to generate a sort of macro price-to-book measure. And according to Doug Short of Advisor Perspectives, the Q now tells us that stocks are trading 66 percent above average mean replacement cost—higher than ever before save for the tech bubble.
The explanation behind the rise in valuations isn't too complex.
First of all, many investors continue to believe that the economy is slowly picking up steam and will continue to get stronger. More saliently, though, interest rates have been exceedingly low for this stage of economic growth, largely due to the stimulative actions of central banks in the U.S. and abroad.
In addition to boosting the value of stocks according to popular calculations that use rates to discount future cash flows, the low interest rates also mean that bonds pose an especially unattractive value right now.
"Can the run in stocks continue? Abso-freaking-loutely it can," commented Jim Iuorio, a Chicago-based trader. "You can look at valuations all you want, but when you turn your attention to anything else—what are you going to buy?"
Investors certainly haven't been spooked by the valuation measures, paying more attention to the Federal Reserve's perceived assurances that they won't rise short-term rate targets anytime soon.
"This week saw a massive amount of cash moving into the S&P 500 after the Fed seemed to take a more dovish stance," according to a Friday report from Chantico Global examining ETF flows.
In an interview Thursday with CNBC.com's "Futures Now," the Commodities King said that a combination of a rapidly rising inventories and a strong dollar could lead to $15 oil by the end of the year.
"For months I've said that crude oil is heading from the upper left to the lower right of the chart," said the CNBC contributor and editor and publisher of The Gartman Letter. "I wouldn't be surprised if oil went down to about $15 a barrel."
Crude oil prices have been in a steep and steady decline over the past six months, down more than 50 percent trading just above $40 a barrel. Traders had hoped an improving economic picture in both the U.S. and Europe could give crude a lift.
Peter Schiff has a simple message for traders: you don't need patience.
While Wall Street waits on whether or not the Fed will include the word "patient" in its statement Wednesday, the CEO of Euro Pacific Capital is instead waiting for something else: another round of quantitative easing.
"I think the Fed is more likely to launch QE4 than it is to raise interest rates," Schiff told "Futures Now" on Tuesday. "Wall Street is looking for the Fed to take [the word 'patient'] away because the Fed wants to maintain the pretense that they are actually going to raise rates, but I don't think that's going to happen at all."
Despite a falling unemployment rate and record stock prices, Schiff contends the U.S. economy is much weaker than it appears, and that any move by the central bank to raise rates would only derail an already fragile economy.
"The U.S. economy is sicker than ever," said Schiff. "And the Fed is going to launch QE4 for the same reason they launched QE3, 2 and 1. They're going to try to stimulate the economy. Now that they stopped QE, the air is coming out of this bubble."
Stocks and bonds have always responded to the latest economic data releases. But with the Federal Reserve potentially set to hike rates as early as June, the markets' data dependency could degenerate into a full-out data addiction.
It's not that investors have suddenly taken a greater interest in the growth rate of the economy. Rather, since the general trend of growth puts the Fed on pace to hike raise, each individual data point is starting to take on a greater import.
Some even suggest that this is by design. That is, the Fed may be creating a deliberate show of tying policy to data, in order to slowly reacquaint the market with volatility after years of quiescent gains.
With the Fed "deemphasizing forward guidance, we believe that the market finally is truly data dependent," Bank of America Merrill Lynch (BofAML) rates strategists wrote in a recent note. "The sensitivity to data surprises is much greater today compared with the last few years, and we expect it to continue into the first hike."
The strategists point out that the frequency of massive daily moves in interest rates (and bond prices, which move inversely to rates) have increased dramatically.
In fact, rate volatility is about as high as in the mid-2013 "taper tantrum," when the Fed weighed pulling back on quantitative easing. And many of the recent moves are in reaction to important economic data releases such as the jobs report—the BofAML team points out that rates on 2-year and 10-year Treasury instruments "have moved twice as much on payroll days since October compared to the 10 months prior."
Marc Faber is well-known for his persistently bearish take on U.S. stocks—as his nickname, Dr. Doom, implies. But now he argues that large-cap American equities could actually be a great spot to keep one's money.
"I'm an investor, and I invest. Do I want to buy European sovereign bonds at a negative yield where I'm sure to lose some money—not a lot of money, but some money? Or do I want to be in some blue chip stocks? If I take a 10-year view, I think I will make more money in blue chip stocks," Faber said Thursday on CNBC's "Futures Now."
Faber makes it clear that American stocks aren't necessarily the best pick right now. He calls the U.S. market "expensive," in contrast to "reasonably priced" European stocks. And emerging market equities are his preferred pick.
"I think that I will make more money in emerging markets than the U.S. in the next 10 years," he said.
Currencies like the Turkish lira and the Brazilian real may not always be foremost on investors' minds. But according to Scotiabank's chief FX strategist, Camilla Sutton, emerging market currencies are sending powerful signals about what the U.S. dollar will do next—and could convey a loud message to the Federal Reserve.
As the dollar has surged this year and oil has continued to crumble, emerging market currencies have felt the pain. The real has fallen 16 percent against the dollar year to date, dropping nearly a full percent on Tuesday alone—a huge move for a currency. The lira has been another big decliner, retreating 1.2 percent against the dollar on Tuesday, for a 13 percent drop on the year. And the Mexican peso is at all-time lows against the greenback.
Obscure as these moves might sound, Sutton says that if they intensify, they could actually cause the Fed to delay rate rises.
There would be precedent for such a market-based reaction by the central bank. Back in 2013, then-Fed Chair Ben Bernanke's suggestions that he would put an end to the quantitative easing program was met by big moves in bonds and currencies alike, which has become known as the "taper tantrum." Many believe that the reaction delayed the actual start of the tapering of asset purchases.
"When we have the taper tantrum that's still pretty close at hand, [emerging market currency moves are] really an important piece over all. And I think it's one of those pieces that does drive the Fed to be cautious once we have the first rate hike in," Sutton said Tuesday on CNBC's "Futures Now."
The better economy doesn't necessarily make for the stronger market. For investors who have stuck with US stocks to the exclusion of European and Asian equities, the beginning of 2015 has served as a bitter reminder of that fundamental fact.
Over the first 44 trading days of the year, the S&P 500 Index has risen just 0.6 percent—with no help from an especially rough Friday session. Meanwhile, Japan's Nikkei 225, India's Sensex, and Germany's DAX have each risen some 7 percent.
Some of these gains can be pinned directly on falling currencies. As currencies like the euro and the Japanese yen weaken against the U.S. dollar, assets denominated in those currencies should be expected to increase in nominal value (given that it will take more of these weaker euros, say, to buy the same number of shares).
In "real" terms, the gains do lose a bit of their shine. For instance, the Euro Stoxx 600 is up 15 percent this year in euro terms, and 5 percent in dollar terms. Of course, that's still double the S&P's run.
"All in all, this underscores the need for U.S. investors to hedge foreign investment in a strong dollar environment," commented Win Thin, global head of emerging market currency strategy for Brown Brothers Harriman.
Yet there's more to foreign outperformance than the rapidly rising dollar. While the U.S. economy is one of the strongest in the world, expectations about what large-cap companies will earn (and earnings, after all, are what people buy stocks in order to access) are falling fast.
At the end of 2014, analysts were looking for S&P 500 earnings growth of 8.0 percent; today, the expected full-year growth is a mere 2.4 percent, according to FactSet senior earnings analyst John Butters. Even once plunging energy earnings are removed, expectations have fallen by more than 2 percent (from 11.4 percent to 9.1 percent).
At the same time, most think that America's rapidly improving employment picture will push the Federal Reserve to hike its key federal funds rate target at some point this year. This could tamp down equity gains, and further strengthen the U.S. currency (as holding dollars will become a more attractive proposition once short-term rates rise).
It's been a difficult week for the market. But according to noted technician Louise Yamada, the S&P 500 could soon be in for a 12 percent rally.
Furnishing a chart of the large-cap index, Yamada says that 2,130, which is just a bit above current levels at 2,100, has become a key testing ground.
"What we'd like to see, ultimately, is for the S&P to turn around and lift through this resistance neckline, if you will. And that would happen if we went shortly through 2,130," she said Thursday on CNBC's "Futures Now."
The market may be obsessed over when the Federal Reserve will raise its short-term rate targets from economic-crisis levels. But according OppenheimerFunds' chief economist, Jerry Webman, using the central bank's words to try to divine the timing of that event has become a fool's errand.
"The Fed has been very clear. They expect to raise rates—'expect,' and I want to emphasize that—they expect to raise rates this year," he said Tuesday on CNBC's "Futures Now."
But will they actually end up pulling the trigger? For Webman, the answer lies not in Fed decision-makers' words or thoughts, but in the coming stream of economic data.
"We should be watching the data, not poring over—like we're some medieval scholastic scholars—every word the Fed says. If inflation numbers stabilize, employment stay OK, we continue to see the employment cost index go up a little bit, then the Fed will tighten, maybe in June, maybe in September," he said.
For American workers, it's about time. For corporate America, however, it may mean trouble.
After years of seeing salaries stagnate, U.S. earners are finally starting to make slightly more, with signs pointing to further wage increases to come. Yet the additional compensation could be bad news for the businesses that find themselves forced to pay up. The extra labor expense is expected to cut into profit margins, and consequently diminish returns for investors, according to some analysts.
"What's happening is that Wall Street and Main Street have switched places," Eddy Elfenbein of Crossing Wall Street wrote to CNBC. "Workers are finally getting wages while corporate profit growth has stalled. In the early stages of the recovery, it was the other way around—profits soared while jobs stagnated."
Indeed, employee compensation is finally showing signs of life.
In a much heralded boost, average hourly earnings for private workers rose to $24.75 in January, a 2.2 percent year-over-year increase. And thanks to a mix of higher wages and more people working, total compensation of employees in the fourth quarter rose 4.7 percent year over year, according to the revised U.S. growth report report released on Friday.
It's not simply that wages are tracking inflation, either. The Bureau of Labor Statistics reported on Thursday that average hourly earnings rose 2.4 percent in "real" terms from January 2014 to January 2015 (due to recently falling prices that can be pegged on lower energy costs).
On Friday, investors will learn just how much wages rose in February when the latest employment report is released, alongside news on nonfarm payrolls and unemployment.
Of course, it is the big drop in unemployment that is leading to recent increases in compensation. Wage pressures are expected when the unemployment rate falls, given that a lower jobless rate indicates that the supply of labor is decreasing.
And it's not just the hard numbers pointing to compensation boosts. In a splashy move by the world's biggest retailer, Wal-Mart reported last month that it is increasing its lowest wages to $9 per hour by April, and $10 by next February. Ford and TJX Companies have also moved to increase wages.
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