This signal tells investors high-end stocks are ready to fall back to Earth, says fund manager
It has been a good year for value investors. The Russell 1000 RLV Stock Index,
gained 17%, while the Russell 1000 RLG Growth Index,
only increased by 3%. Still, that doesn’t really change the performance of the past 10 years, in which growth stocks, on the same measure, jumped 311%, compared to a 134% gain for value.
This parenthesis is used to present the latest thoughts from Ben Inker, head of asset allocation at GMO, the Boston value fund manager. Ink and GMOs have made numerous warnings about intoxicating stock valuations, but in the investment firm’s latest quarterly letter, he says the supply is a good predictor of future declines.
U.S. equity issuance as a percentage of gross domestic product, he notes, is higher now than even the dot-com bubble. The past 12 months have seen 2.5 times the total issuance of Special Purpose Acquisition Companies, or SPACs, in all of history to date.
Inker turned to the housing market to show how supply can be a predictor of future price declines. House prices, as the 2008 global financial crisis approached, correlated only with 4% with the subsequent decline. Price-to-income assessments did a better job, with a correlation of 51%, but the best predictor was the increase in housing supply, with a correlation of 69%. “The correlation, in a known way, does not prove causation, but the data on the housing boom of the 2000s are certainly compatible with the increase in supply which ends up exerting pressure on prices, supply being a as big a problem as valuations in a speculative boom, ”says Inker.
Inker says the timescale for eventual deflation of the current speculative bubble will not be “that long” and fears the rest of the market may slip with the more speculative games. “If the whole market is dominated by speculators with outsized expectations, it seems likely that deflation in the obviously speculative level will take the whole market with it,” says Inker.
The market as a whole needs a “combination of economic growth strong enough to keep corporate profitability strong and not strong enough to rekindle inflationary concerns,” he adds.
Inker says that easy protection is not in owning the speculative end of growth. “It’s no coincidence that the current value is almost as cheap as it has ever been compared to the market, but it’s practical nonetheless. You can protect your equity portfolios by choosing to steer them towards value and away from the costliest end of growth, ”he says.
Minutes fed on tap
Minutes from the Federal Reserve’s latest interest rate setting meeting will be released at 2 p.m. As traders look at comments on how the central bank viewed inflation and its view. on its bond purchase program, the meeting was held before the publication of the Ministry of Labor. consumer price data for April, which showed inflation had peaked nearly 13 years.
Another day of retail sector profits was in the spotlight, as the Target TGT discount,
exceeded expectations with a 23% increase in same-store sales and home improvement chain Lowe’s LOW,
easily exceeded expectations after a 26% increase in same store sales. After the closing, the network equipment manufacturer Cisco Systems CSCO,
reports the results.
Wells Fargo WFC,
was demoted by UBS to neutral, after a run in which the bank jumped 123% from the end of October.
The European Central Bank has warned that withdrawing support for the COVID-19 pandemic from governments could lead to increased insolvencies in the euro area.
House Speaker Nancy Pelosi has called for a diplomatic boycott of the upcoming 2022 Winter Olympics in Beijing for human rights violations.
Shaky stocks as bitcoin crumbles
The S&P 500 SPX,
quit five of the last seven sessions, and ES00 equity futures,
pointed to further lows. The 10-year Treasury yield TMUBMUSD10Y,
The most severe action has been in the cryptocurrency space, with bitcoin BTCUSD,
struggle to maintain the level of $ 40,000.
Researchers use viscous molds for planning urban transport networks and escape routes for large buildings.
This British football club thrived under American ownership on a small budget, thanks to its analytical approach.
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