I (Marcus) wrote on Saturday that “As the market floats in space, happy go lucky, we have to ponder where the gravitational pull is going to come from, the as yet unclear 2020 development that brings it back down to earth, because, as my accountant, a not unintelligent man, said to me last year, and is clearly saying to his clients, feeling it in his bones, and if he thinks it many probably do….“It’s coming, we all know it’s coming”. A correction that is.” And so the emails started. It is on everyone’s mind as the market hits all-time highs here and in the US.
“Is a correction imminent” asked one article I read on the weekend (you probably saw it too) – it came to no conclusion and (as a side point) did little more than waste our time quoting past statistics which I always find is a poor excuse for insight and no reason to pay an ‘analyst’ a salary. We have Google for statistics. Lines like “Since 1970 the market has had a correction in 14 out of 50 years of x%…blah blah blah”…doesn’t help.
And Henry is on to the debate in Henry’s take this morning talking about a Time Bomb.
As I wrote on Saturday, FOMO has sucked us back into the herd and for now we are going to give the market the benefit of the doubt. But I’m watching.
Watching the S&P 500 being more overbought than it has been since before the January 2018 sell-off:
Watching the ASX 200 at the top of the long term trading range and being more overbought than it was prior to that July correction last year:
Watching $27.58 trillion dollars worth of companies in the US being valued at a PE of 23.4x which is not a ‘real world’ PE – no-one would pay 23.4x net profit for an unlisted business (buy Marcus Today off me at that price and I’ll erect a monument to you) – yet here we have $27.58 trillion dollars worth of listed companies trading at that PE. The earnings number needs to go up to lower the PE (maybe it will this results season) or the Price, the “P” in the PE has to go down.
Watching the VIX volatility index in the US back at very comfortable settings from which something usually goes wrong. If you are supposed to buy when others are fearful, then you wouldn’t be buying.
And the Australian ASX 200 VIX volatility index is doing the same:
And we’re watching the CNN Fear and Greed index hit “Extreme Greed” as Henry also notes in his section today.
CONCLUSION – We learned our lesson last year, fearing a precipitous correction and going to cash, but we went to cash for good reason, not because of ‘price’ alone. We went to cash on hard evidence of an imminent collapse in trade relations that would have brought on fears of US recession and a global growth slowdown. If the Chinese had two-fingered saluted the US without a deal, the markets would have plummeted. It didn’t happen in the end…trade talks flicked from dysfunctional disaster to “Love Fest” in a day. But we had reasons to fear the market, beyond price alone.
At the moment we are fairly fully invested but have no reasons to assume a precipitous fundamental collapse other than price. The only problem is price, and if that’s all that’s wrong we are not about to start wagging fingers, cashing up and being ‘spooked’ out of the market. Price is not enough and we know better than most, that Chickens don’t make money.
We need something more substantial and fundamental to go wrong and on the face of it, apart from price, there’s nothing. We have progress on trade, Central Bank stimulus everywhere, economic numbers behaving themselves (OK Chinese GDP number on Friday), interest rates have stopped trending towards zero (the bond markets are less worried) and so, on the face of it, no macro reason to duck out.
Plus…if price is the only issue then we need not worry. A correction on price alone will not be seismic and will be short-lived. We need something more than that to spook us.
Bottom line: We stay invested until we have macro or stock specific reasons not to be. We’re not selling on price alone. But we have stopped buying…