“Stocks are expensive.”
We’ve been hearing that a lot lately from our subscribers. This statement is used as a blanket refusal to accept that stocks can go higher from here.
Well guess what?
The U.S. stock market is currently trading at a price-to-earnings ratio of 21 times (on an earnings estimate for the next twelve months). And it can go higher. It has in the past.
Over the last few weeks, Hedgeye CEO Keith McCullough and analyst Darius Dale have spent a lot of time on the road meeting with institutional investors. We’ve heard arguments like these before.
“If you pull back a historical chart of valuation we’re just north of the median,” Dale says in the video above. “As expensive as everything feels, things can get a lot more expensive.”
McCullough calls up a chart of the S&P 500’s P/E from 1990 to present day. The average S&P 500 multiple is 19.8 times. “That’s what people miss, is that expensive can get more expensive. Investors try to fight this into these huge crescendos that eventually sucks every guy in,” he says.
What actually matters is your catalyst to send stocks higher. U.S. economic growth is acceleration. That means stock can get more expensive.
The market already gets this. The Russell 2000 is up +9% in the quarter-to-date. “This is the pure play of being long the U.S. economy,” McCullough says. The current bet pushing markets ever higher is #StrongDollar, #StrongAmerica. The U.S. Dollar is up +7.8% in the quarter.
Emerging markets, currencies and real estate have been absolutely shellacked on that move. Here’s a scorecard for the quarter-to-date:
- Emerging Markets (EEM): -5.2%
- Hang Seng: -5.5%
- U.S. Dollar versus Yen: -14%
- MSCI World Real Estate: -8%
What to do? The easy answer is, “Don’t be long all that,” McCullough says. “You can go back and keep talking and whining but if the Dollar continues higher these things are going to continue to underperform,” he says. Meanwhile, the expensive Russell 2000 is getting more expensive.
A final word of advice from McCullough: “If you missed the move, don’t get upset, you get what you get. Let’s go out there and make some money this week.”
