What’s going on with the markets?
Stocks are historically cheap or headed for a crash. Bonds are rationally priced or a sucker’s bet. And earnings are either under or overestimated.
Looking at the stocks, we’ve recovered about half of the value lost during the great bear market. Stocks are discounting a slow-growth recovery. But earnings have not grown slowly, and as a result the market is as cheap now as it was in 1979 or 1974.
Bond yields have fallen to historically low levels. The bond market is forecasting an accommodative Fed for the next several years, and then only modestly rising rates. By some measures, short-term rates would be negative if they could be. Most forecasts of the fundamentals don’t indicate rising rates for a long time.
Earnings estimates have been way short of the mark, so far. They usually are in a recovery. Two out of three companies have beaten their estimates. Most analysts now predict that this earnings recovery will remain solid.
Taken together, we’re an unstable equilibrium. These three factors can’t coexist. Stocks have to rise, bonds have to fall, or earnings have to collapse. My expectation is that we’ll get a little of all three: higher stock prices, higher bond yields, and moderating earnings. Call it all of the above.
Douglas R. Tengdin, CFA
Chief Investment Officer
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