If you believe a widespread collapse is coming, what do you buy? Marc 'Dr. Doom' Faber opens the hood on his portfolio.» Read More
If everything's expensive, then what do you buy?
That's the riddle facing Yale economist Robert Shiller, who makes the case that both stocks and bonds look expensive now, and "bubbly thinking" abounds.
Shiller's advice is actually three-fold. First, find a proper asset balance for your portfolio. Second, use the strategies of "value investing" to pick the best stocks out there. Third, temper your expectations.
Equity valuations aren't justified, "but I would say that they're not outrageous yet. And given the alternatives, I think people still should have money in the market," Shiller said Thursday on CNBC's "Futures Now." "The lesson now is not to go overboard in the stock market, and also to have enough savings for your retirement, because the market overall is not likely overall to do as well as it has in the past."
When asked what sort of allocation percentages people might want to target, Shiller demurred.
"That's a difficult question! My first advice to most people would be, get a financial advisor. Because the answer to that question depends on your circumstances, your fears, your desire for a bequest to your children, whatever. And so there's no simple answer," Shiller said.
But for this Nobel laureate, the basic idea of asset diversification holds.
"I think that the general rule is, you do want to diversify across all the asset classes. Bonds and stocks look pricey, real estate is starting to get pricey. So, you know, you've got to put your money somewhere," he said.
David Rosenberg, chief economist and market strategist at Gluskin Sheff, famously (and for some, infamously) turned from a long-term bear to bull in 2012. He's still optimistic about the U.S. economy and American equities. But now, Rosenberg admits to becoming somewhat discouraged by data he's seen—and perhaps a bit more skeptical about the future.
"I have to say that for a former bear-turned-bull who tried for the past two years to see the world from a cup-half-full lens, the last few weeks have been more than just a bit frustrating," Rosenberg wrote in a Monday note. While he's not changing his views just yet, Rosenberg said he has "no intention of sitting on a stale view," and compared his reassessment to a ratings agency putting "a doubtful debtor on 'credit watch.'"
On Tuesday's "Futures Now," he made it clear that he was none too enthusiastic about the pace of economic growth.
"I'm reconsidering in the sense that I don't think we're going to see a significant rebound—call it something better than 3 percent for the second half of the year," Rosenbeg said. "There was a point at which I thought that was achievable, especially because of the job gains we've seen. ... But what's happening is that the savings rate in the household sector is going up. ... The spending numbers are lagging well behind whatever we're seeing in unemployment and income, and that's caused me to shave back what I think was an above-consensus view for the second half of the year," he said.
A glance at a chart seems to indicate that stocks are expensive. After dropping 4.3 percent from high to low, the S&P 500 is nearly back to record levels. And as bears delight in pointing out, the market has not suffered a 10 percent correction in more than two years. But according to one simple measure of market valuations, investors who buy stocks now are getting a much better bargain that those who bought earlier.
In 2014, "different than 2013, the move higher is driven primarily by an improving corporate outlook than a re-rating of market multiples," writes RBC chief U.S. market strategist Jonathan Golub in a Monday note. "In fact, forward P/Es [or price-to-earnings ratios] have actually contracted modestly, making stocks a more attractive purchase."
Translation? Investors are paying less for every dollar of expected earnings.
As for reported earnings, they have come in above expectations. According to FactSet, of the S&P 500 companies that have reported their second-quarter results, 73 percent have beaten analyst earnings estimates and 64 percent have beaten revenue estimates. That means that while analysts on the whole were looking for earnings to grow 4.8 percent in the second quarter, so far we've seen a blended growth rate of 7.6 percent.
And with companies beating expectations, analysts have responded by raising their estimates of the earnings that companies will report in the future.
"Over the past four months, estimates have begun to rise for 2014. Higher estimates are likely the result of stronger management guidance and greater analyst confidence. We believe this is a bullish sign for equities," Golub writes.
As a spate of housing data are released in the coming week, Wall Street will attempt to answer a burning question: Is the housing market becoming a big drag on economic growth?
"We are laser-focused on this housing data coming out, because we have seen that the backbone of the recovery was housing. Now it's faltering slightly. So if we see another mishap here, maybe that adds to the slowing global growth—especially domestically," said Jeff Kilburg, chief executive of KKM Financial.
The data start to emerge on Monday morning, when the National Association of Home Builders releases the latest reading on its housing market sentiment index. That widely watched gauge of the housing market rose to a six-month high in July, but is still down on the year.
On Tuesday, the all-important housing starts number will reveal how many residential buildings began construction in July. The July number will follow a big disappointment from June, when 893,000 homes were started on a seasonally adjusted annualized basis—a nine-month low.
Thursday's existing home sales data will round out the week.
Recent indicators have not squelched concerns about housing. On Wednesday, the Mortgage Bankers Association reported applications to buy a house fell to a six-month low in the week prior.
Still, there are some reasons for optimism. According to Freddie Mac, 30-year mortgage rates have fallen to just 4.12 percent, which brings it back to its lowest levels on the year.
Given the decline in interest rates, as well as this year's impressive employment growth, "I would have expected more out of housing," said Stuart Hoffman, chief economist at PNC Financial Services. The weak housing market "is a disappointment, and somewhat of a downside risk to the economy. But with mortgage rates coming down and credit standards loosening, I would expect housing to have a better second half of the year."
After falling more than 4 percent from recent highs, the S&P 500 has gained back about half of what it lost. But MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch, says the correction isn't over yet—and he says it won't take a spate of bad news to push stocks lower.
Actually, on Thursday's "Futures Now," he took issue with the whole idea that markets make big moves in response specific datapoints or events.
"I'm not a big believer in catalysts. I think if you go back, if you look historically, most market moves don't transpire off of catalysts," Curry said. "The information as to why a market is trending in the direction it is, is usually not known at the time the trend is beginning. So I don't think we necessarily need a catalyst. I mean, there could be a thousand reasons why an investors says, 'You know what? I want to turn more bearish here.' [And] what drives a market is sentiment."
The crude oil market has seen dramatic spikes starting with the Arab Spring in 2010 and continuing into this past June, but some investors are betting that the bull market for oil is over.
Copper futures slid more than 1 percent Wednesday, falling to the lowest level since late June as investors looked at an increasingly dour picture for global growth.
According to data released Wednesday, China's industrial production rose 9 percent in July, and its retail sales rose 12.2 percent. Both numbers missed expectations. And in more bad Chinese news, new loans for July fell nearly 70 percent from June.
In reaction to the disappointments, the industrial metal copper—which is used in everything from factory equipment to new buildings–dropped sharply overnight, hitting the lowest level since June 20.
"It's pretty much the Chinese data that really sank the copper market, and the business with new loans," said Edward Meir, a metals analyst with INTL FCStone. "All these Chinese stimulus measures really fell short when it came to changing the psychology."
In a classic 1899 poem by Stephen Crane, a man insists to the universe that he exists, only to hear the universe reply: "The fact has not created in me / a sense of obligation." As the Federal Reserve looks to adapt to changing economic conditions by removing stimulative policies, the conversation between chair Janet Yellen and investors could sound somewhat similar.
"If the numbers change and the Fed rhetoric all of a sudden changes, they're not going to care whether investors feel like the rug got pulled out from underneath them," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank, on Tuesday's "Futures Now."
The Fed is currently using an ultralow target on the federal funds rate to keep short-term interest rates low. But as economic conditions change, the Fed has said they will raise rates.
"The great economist Wayne Gretsky said you have to skate to where you think the puck is going, not where it is, and the problem the Fed has is that by its own forecasts, you're going to have real interest rates that are still sharply negative next with an economy already at full employment and inflation at target, and yet somehow bond investors think rates are going to stay where they are," LaVorgna said. "So the problem is, if you wait till the last minute, which is what this Fed wants to do, you do really risk financial issues, and the fact that you may ultimately destabilize the economy because you have to raise rates significantly more than you thought. That's the problem."
Is there something seriously wrong with the economy?
It's a scary prospect, and a concern that's gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of "secular stagnation." And it's a phrase that Fed watchers are likely to hear more and more in the months ahead.
Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy. And while Fischer avoided the phrase "secular stagnation" in his Monday speech, Minneapolis Fed President Narayana Kocherlakota is planning to host a November symposium that directly addresses the issue of secular stagnation by name, CNBC has learned.
"I think there's a lot of concern about how long this will last, and I think that's certainly high on the agenda right now. At least people are entertaining that possibility now that it could drag on for longer," said Brown University associate professor of economics Gauti Eggertsson, who authored (along with fellow Brown economist Neil Mehrotra) the landmark paper "A Model of Secular Stagnation," which provides an in-depth explanation of how a long period of low growth could come about.
The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment—at least in the absence of robust government intervention, which soon came in the form of the second world war.
These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.
In November 2013, noted economist Larry Summers (who was considered, alongside current Chair Janet Yellen, a leading candidate to head the Fed) began to invoke the same phrase in arguing that the interest rate that the economy requires has fallen below zero.
The problem is that it is very difficult for nominal interest rates to fall below zero due to a constraint known as the zero lower bound. The upshot? Even with the Fed keeping short-term rates just above zero, market interest rates cannot possibly create adequate demand for loans, and thus the economy stagnates.
Without embracing the secular stagnation thesis, in Sweden on Monday, second highest-ranking Fed official Fischer gestured toward those concerns.
Noting slow growth in "labor supply, capital investment and productivity," Fischer warned that "This may well reflect factors related to or predating the recession that are also holding down growth" and noted: "How much of this weakness on the supply side will turn out to be structural—perhaps contributing to a secular slowdown—and how much is temporary but longer than usual lasting remains a crucial and open question."
"There was a level of concern on that point that I don't think we generally hear," said Nicholas Colas, chief market strategist at ConvergEx, referring to Fischer's speech.
The stagnation debate will also be addressed by a new eBook entitled "Secular Decline," which is due to be published on Aug. 18, and hosts contributions from Paul Krugman and Nomura's Richard Koo, in addition to Summers, Eggertsson and Mehotra, and others.
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