From Bloomberg, August 18:
US Stocks Look Even Pricier Now Than In January
As Howard Marks of Oaktree Capital points out, it might be time to focus more on defensive investing.
You’re not imagining it, US markets are pricey
Howard Marks at Oaktree Capital is one of the most reliable sources of genuinely approachable market wisdom in markets. His latest memo is an excellent example.
He lucidly explains the difference between “price” and “value,” examining the drivers of each. If there’s a beginner investor in your household, you could do a lot worse than print them a copy of this memo and get them to read it. It’ll give them a far better understanding of how markets really work than many of the theory books.
Anyway, I thought we’d discuss this memo today because Marks has decided it’s time to take a look at US equity market valuations again. This has been a topic we’ve spent a fair bit of time on in the recent past.
Marks makes the point that US equities (as measured by the S&P 500 headline index) were pretty expensive by historic standards at the start of the year. But he wasn’t overly concerned because sentiment-wise (in his view — I’m not sure I agreed) the market didn’t look too bubbly.
Tariff announcements in April and ensuing trade war fears saw the S&P 500 fall hard. But, in local currency terms at least, the market has rebounded sharply and is now back at new highs.
Yet, as Marks points out, while the tariffs may not be as bad as expected, they’re still worse, trade-wise, than the status quo. Inflation is still a worry and pushing back against the prospect of interest rate cuts. The US’s status as a reliable ally is more questionable than it was. And there’s no sign of the public sector balance sheet being repaired any time soon.
In short, “the value proposition in US stocks seems to be less appealing today than it was at year-end — and even then it wasn’t great.” And this time, Marks reckons that sentiment — with the return of “meme stocks,” for example — looks rather more bubbly than it did at the turn of the year.
What’s driving this? Investor optimism is based partly on a lengthy period in which “buy the dip” has been the best strategy when it comes to US stocks, which has contributed to the sense that “there is still no alternative” to the US. Meanwhile the sector-specific “big exciting story” is the rise of AI, onto which virtually any hope for growth can be pinned.
What To Do About It
But what do you do about it? In his memo, Marks reiterates that a market being overvalued does not mean that it’s “sure to go down soon.” However, it might be sensible for investors to “reduce aggressive holdings and increase defensive holdings.”
He doesn’t elaborate on what those might be, but as we’ve discussed here a few times, cheaper assets can be seen as being more defensive than expensive ones, because there is more scope for bad news priced into the former than the latter.
Meanwhile, when it comes to catalysts for another move lower — Michael Hartnett over at Bank of America reckons we might see it as soon as next week. More specifically, he thinks that a “dovish” outcome at the Jackson Hole meeting might be what the market has been waiting for, as investors who bought the market hoping for reassurance from Federal Reserve boss Jerome Powell actually get it, and then “sell the news.”
Just like the rest of us, Hartnett and his team have no crystal balls. So unless you’re an ardent and experienced gambler, trying to place bets on exactly when the downside might materialise is a fool’s errand. Shortselling is a noble art, but one whose practitioners rather too frequently end up being carried out on their shields....
....MUCH MORE
