Stocks Are Stunningly Cheap
It’s best to focus on individual situations when trying to make money, but that’s hard to do when there’s a constant sideshow going on called macroeconomics. Where are markets going over the next few months? It’s what everyone wants to know!
There looks like a dislocation between stock prices and things going on in the world. We’re barely out the other side of a global pandemic, but stocks are trading as if it never happened. If you consult investor sentiment surveys, it’s mainly bearish and cautious.
This could be the right approach, or there could be pluralistic ignorance in play here. It seems everyone believes that everyone else believes that stocks are too high, but no one actually believes stocks are too high because the proof is in the pudding; we’re all tripping over each other to buy ‘em!
Forget the ‘emperor’s new clothes,’ more like the ‘emperor’s new markets;’ pluralistic ignorance writs large, and as Warren Buffett’s famous aphorism goes, “you only find out who’s swimming naked when the tide goes out.”
Let’s not swim naked. In fact, let’s not even think about what other investors believe or don’t believe. If we’re in these markets, it’s because we feel we have an edge over the crowd, a reason to outperform, so let’s employ our own thinking when making investment decisions.
The stock market level, for example, is all about interest rates, and this is forgotten a lot. We saw stocks peak at price earnings ratios of about thirty when the dot-com bubble burst, so investors took that peak as their bogey and now contend that if stocks reach P/E 30x, panic!
Well, Nvidia trades at 40x, Lululemon at 36x, Mastercard at 29x, Bank of America at 30x, I could go on, but really, we’re not comparing apples to apples. Interest rates were 7% back in 2000. Today, they’re 0%, and this matters because interest rates are like gravity to stocks.
The lower rates go, the higher stocks go, because investors rotate out of bonds and into stocks when their bonds earn a low rate of interest. It’s opportunity cost, and it’s something to ponder. It might be crazy, but if rates don’t rise as the Federal Reserve has said they won’t, stocks are stupid cheap. Nvidia, Lulu, Mastercard, should all be trading above 100x earnings.
This isn’t greed. This is logic. The Invstr community… push back!
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.