The election dominated the news last week, of course. Markets rallied strongly across the board, with the dollar strengthening globally. Bitcoin was a big winner, passing above $80,000 per coin. I have been a critic of cyptocurrency (here’s why), but I have softened in that view in recent years.
The Fed cut rates last week, as expected, and Powell reiterated the Fed’s changed view: that employment now has bigger risks than inflation. It seems likely that rates will continue to come down, and markets have an 85% chance that the Fed will cut again in December.
Most companies have reported earnings, and it looks like companies grew earnings by about 5% over this time last year. This is pretty dissappointing, especially when compared with the 36% run-up in the S&P 500. That run has been largely driven by investor’s willingness to pay higher valuations for the same stocks. Current valuations imply the S&P 500’s return will be in the 3%/year range over the next 10 years — not much to write home about. More on that in this week’s chart.
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Despite the past week’s rally, the underlying economic data has me very concerned. While it is possible that we buck historical precedent and return to strong growth, I think that is unlikely (indeed, Buffet himself has been to selling his profitable positions, and is now sitting on about 25% cash). More likely, we are late in the economic cycle and recession is closing in. Of course, exactly how we manage that in your portfolio is dependent on your goals.
Chart of the Week
This week’s chart comes to us from LPL Financial and demonstrates my concern with valuations. The price-to-earnings ratio is the price that investors are willing to pay for every $1 in company earnings. As this chart demonstrates, as P/E ratios get higher, 10-year returns tend to be much lower, including going negative. With its current P/E ratio, returns for the S&P 500 are implied to be in the 3% per year range.
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