Good morning. It’s a particularly good morning when you manage to annoy both crypto-heads and gold bugs. It turns out, the cryptos don’t like it when you point out that digital currencies designed to skirt regulations appeal to criminals, while gold bugs never like you unless you, too, believe that bullion will be trading at US$10,000 next week, maybe sooner. Heaven forbid you notice gold lost some of its lustre this week. It all comes down to a matter of values, both ethical and market based.
For example, one reader recently asked if the S&P 500 is fairly valued given its price-to-earnings ratio is around 24x, according to Gurufocus.com LLC, compared to more than 40x at the beginning of 2021 in the midst of techmania, and the forward PE is about 18.4x. The S&P 500’s current ratio could seem like a reasonable buy-in point, but the index is overvalued by other metrics. For example, the median average is about 17.8x and the Shiller PE ratio (which considers 10 years of earnings instead of one year) is 29.4x compared to its historical mean of 17x. It’s up to you to choose which metric to go with, but you’re going to hear some strong opinions along the way.
“I said it once and I will say it again, even if we don’t get a recession, this market is very expensive,” says economist David Rosenberg in his Breakfast with Dave note on Tuesday. If we get a recession, he puts the S&P 500’s PE ratio at 16x, which implies a target of 3,120 points. “It’s not personal, Sonny, it’s strictly business.” Even without a recession, he believes the S&P 500’s fair value is at or slightly below the 4,000 mark (it closed Thursday at almost 4,200). “There is no path for the next year that should be leaving the S&P 500, on purely fundamental and valuation grounds, above where it is today. Of course, if we want to talk about momentum, herd mentality, price chasing and the Greater Fool’s Theory doing the job, that’s a different matter altogether.”
Even if you think the S&P 500 is fairly valued, it’s important to realize that Big Tech is doing most of the heavy lifting on this year’s increase of 9.3 per cent. Even more specifically, the index would be in negative territory this year if not for artificial-intelligence-related tech stocks, according to a recent analysis by Société Générale SA.
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Furthermore, it seems that quant funds are the ones doing most of the trading because they’re locked into metrics not current events. “These funds move fast and unemotionally,” says Charlie McElligott, an equity derivatives strategist. “They’re not parsing through earnings or taking a view on the stickiness of inflation … this is about price trends and momentum.” The rest of us have been put off by the regional bank failures in the United States, the raging U.S. debt-ceiling debate and a possible recession here, there and everywhere. “Discretionary investors have basically refused to engage with this rally so far,” says Parag Thatte, a strategist at Deutsche Bank AG.
One thing in favour of the bulls is the belief that stock markets rise once central banks stop hiking rates, but it turns out there isn’t much of a correlation between the two at the six-month and one-year points following the final increase, nor during the span between the last hike and the first cut. “This highlights that there are always myriad influences on market behaviour — not just monetary policy,” says Charles Schwab Corp. chief investment strategist Liz Ann Sonders.
Trying to time the market is not for the faint of heart anyway. It’s time in the market that matters, as Hall of Fame investor Tom Bradley and others have said over and over again. “The market is driven by companies innovating and growing profitably, not by what the Fed says,” he says. “In the short term, stocks are more volatile and unpredictable than the businesses that underlie them.”
A lot of the market and economic signals, not to mention punditry, seem confusing and conflicting, which is perhaps why cash-alternatives exchange-traded funds accounted for 18 per cent of the entire fixed-income ETF market in February, according to National Bank. Even portfolio manager Martin Pelletier says his firm has 10 per cent of its balanced fund in Canadian high-interest vehicles, partly because it’s important to be diversified rather than going all in on one scenario or another. As he puts it, you can always go your own way. Just be prepared for some criticism by others who disagree.
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Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].
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FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.
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Good news for loonie fans: The Canadian dollar is well-positioned to revisit its strongest level of the year as traders boost their bets on the Bank of Canada resuming interest rate hikes. “Should the market-implied odds of another hike continue to move higher, we would expect the loonie to rally in the coming weeks,” says currency analyst Jay Zhao-Murray.
Bad news for Lightspeed Commerce Inc. shareholders: The point-of-sale maker’s fourth-quarter revenue increased 26 per cent from a year ago, but it still lost $74.5 million, and its stock dropped as much as 14.25 per cent on Thursday after those results were announced.
Good news for Toronto-Dominion Bank shareholders: Canada’s second-biggest bank is likely to find itself shut out of U.S. retail-banking acquisitions for three to five years because of the same regulatory problems that doomed its attempt to buy First Horizon Corp., says a Barclays PLC analyst, but the lack of expansion opportunities didn’t faze the market.
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Bad news for Electra Battery Materials Corp. shareholders: The Toronto-based company trying to take on China’s dominance in refining nickel, cobalt and manganese says it faces a budget shortfall of about $50 million on one of its crucial projects due to inflation and supply chain disruptions, and may have to sell its assets. Its shares have fallen about 34 per cent in the past week or so.
Good news for Teck Resources Ltd. shareholders who want to sell: Glencore PLC isn’t backing away from its attempts to completely take over the Canadian miner, but the Swiss giant would also consider buying the coal unit alone if it is split out, though chief executive Gary Nagle called that idea a “distant second.”
Bad news for deflationista investors: The S&P/TSX composite index on Tuesday declined 1.44 per cent, its biggest drop in two months, after inflation came in at a higher-than-expected 4.4 per cent for April and commodity prices dropped.
Good news if own Newcrest Mining Ltd. shares: Its shares have risen about 20 per cent since the world’s largest gold miner, Newmont Corp., proposed a takeover in early February including a two per cent hike on Monday when its board finally accepted the $19.2-billion bid.
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If you have an investing or personal finance question, hit us up at [email protected].
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