In the season eight Seinfeld episode The Money, Jerry says to George, "and you misinterpret this how?" That is how I feel about the current U.S. equity markets. Every minute detail and data point is misinterpreted to paint a positive picture for stocks. The simplest data point, the forward P/E ratio, is at an 18-year high, and sits at above 20x for the S&P 500, a level that, as it has been approached, has led to selloffs several times in that 18-year period.
Yes, interest rates are lower now than they were in 2002, but in 2002, they were lower than in 1995, and in 1995 they were lower than in 1989, etc. A quick check of the yield on the 30-year U.S. Treasury Bond shows that that security Thursday registered a closing level of 1.96%, only the second time it has ever closed below 2%. This move lower in interest rate represents the bond market's very legitimate fear of the impacts of COVID-19 on global growth. So, why isn't the stock market concerned?
I don't know. That's frightening to me. As an active asset manager it is my job to be concerned about the behavior of other market participants. The only concern among other managers seems to be buying the same stocks in the same proportions as each other. It is a dangerous game, and Thursday's mid-morning flash crash showed how quickly it can change.
The bottom line is that COVID-19 has wounded the Chinese consumer at exactly the point when Western economies need that marginal consumption the most. Walmart's (WMT) lackluster earnings were another sign that the U.S. consumer is, finally, running out of gas, and Europe, with exception of the U.K.'s current BoJo Bounce, is either in or just about to enter a recession.
So, what's the next move? My guess is that portfolio managers will start to head for the exits, leaving retail investors in the lurch. There's a reason Morgan Stanley (MS) was able to snag E*Trade (ETFC) for only $58.74 per share when that stock had traded, on an adjusted basis, in the $200s in the early 2000s, and as high as $600 at the peak of the prior tech mania in the late 1990s.
The big guys love to foist things on the little guys. Their minions of analysts (I was a sell-side analyst for 11 years) push ridiculously overvalued fantasy names like Tesla (TSLA) and Virgin Galactic (SPCE) onto retail investors with promises of a brighter future. It's all part of the game.
But now, with the power of information at your fingertips, you can actually out trade the big guys. Take some profits on stocks that have enjoyed the Trump Jump, specifically concentrating on names like Facebook (FB) , Alphabet (GOOGL) , Amazon (AMZN) , and Netflix (NFLX) that don't and probably never will pay dividends. Microsoft (MSFT) and Apple (AAPL) are safer bets, although both are trading at valuation levels not seen since the early 2000s.
Where to put your money? Bonds still look good here. People have been calling for a reversal in interest rates for the past 30 years and have been wrong every time. The (TLT) +20 Year Treasury ETF has been a terrific performer since the late-2018 lows, and the (HYG) high yield ETF has done quite well since then, too, while still offering a 5.0% yield.
So, you can throw up your hands like George Costanza and yell, "Treasuries shouldn't be yielding under 2% and high yield should be yielding much more than 5%" or you can utter, "Serenity Now" and participate in the safety and security of their never ending bond rally without the risk of owning overvalued equities.