Every day the market seems to hit new highs, but the country is such a mess. How can this be?
I have been working on Wall Street for 28 years and I have seen the market when it was crazy optimistic in 1999.
And this market, for all its flaws, is not that.
In addition to all the many metrics that we consider, there are two general rules I use to determine if the market is crazy optimistic: The Who is Left to Buy Rule and The Henny Youngman Rule.
In 1999 it seemed like stocks could only go up. There was widespread enthusiasm and at the peak it seemed like everyone who could buy stocks already had.
Today, not so much. In fact, ever since the bottom of the financial crisis, it seems like this market has been rallying despite the skepticism of the average investor. Who is Left to Buy? There are still many investors sitting on the sidelines. As of the end of last year, BlackRock estimated there was $50 trillion dollars of cash sitting on the sidelines. That’s significant relative to the $65 trillion of global stock market assets.
When someone asked Henny Youngman, “How’s your wife?” Henny replied – “Compared to what.” Currently the S&P 500 is very attractive compared to the Ten-year Treasury. While the Ten-year Treasury yields 2.3%, the S&P 500 yields 1.9%, but should also benefit from a 5% estimated growth in S&P earnings. Yes, valuations are higher than they have been in the past, but that is because bond yields are lower.
Even taking all this into account I know many of you are still thinking, Okay, Manny, but how can the market be rallying despite, to put it mildly, the unconventional presidential style of Donald Trump?
President Trump’s unconventional style has led to a major division within the Republican Party. So, despite the fact that Republicans now control the House, the Senate and the Presidency, the U.S. government is nonetheless gridlocked. Since the markets hate uncertainty, and forward progress on any legislative agenda creates winners and losers, President Trump has not been an obstacle to the market moving higher.
This year stock market valuations have increased, but if rates stay low then valuations could move much higher. In that environment, the low valuation growth stocks that make up the core of our portfolio could benefit the most.
About the Author
Manny Weintraub, CFA, is the President of Integre Asset Management, a New York-based registered investment adviser, which combines large-scale institutional experience and expertise with boutique-quality customer care. A former Managing Director of Neuberger Berman, where he co-managed more than $1.5 billion in U.S. equity assets, Manny is an experienced portfolio manager and contrarian investor. A graduate of the University of Pennsylvania, he serves on the boards of Columbia Grammar and Preparatory School, The Atlantic Theater, and North Country School. To learn more about Integre, please visit www.integream.com.
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