Good morning! A few bits to look at today and then we can go enjoy the bank holiday weekend.



Macro Musings - Ageing Bull

Firstly, there are a couple of macro themes on my mind today. If this isn't your thing, just skip ahead to the next sections! When the RNS feed is quiet, I often prefer to focus on the bigger picture.

As of Wednesday, US markets achieved their longest ever bull market, i.e. from March 2009 to the present day. This entire period has passed without a 20% correction.

The previous longest bull market was from 1990 to 2000, and ended in misery for all sorts of investors who got caught up in the dotcom rush.

The S&P Index enjoyed a P/E rating of between 25x and 30x just before that crash, way above its historical average.

Today, however, the S&P Index is at a much more modest rating of 18x. This is not extreme compared to the long-term average of 17x (since 1990).

The FTSE also does not appear stretched. According to Stocko, the median forecast P/E ratio for all UK shares with estimates is 13.4x.

On this simple view, it is difficult to argue that markets are wildly overvalued at present.

On the other hand, if you use cyclically-adjusted earnings, taking into account the traditional volatility of profits, then US indexes do appear overvalued, On a cyclically-adjusted basis, the US P/E ratio is 33x, not far off double its long term average. This means that US shares are vulnerable to an earnings wobble.

Another red flag is the market's concentration in a small number of high-flying tech stocks. The FAANGs are collectively worth $3.5 trillion at the moment. If a few of them were to fall out of favour, that could be the trigger for a more general loss of confidence. Stockopedia gives these stocks an average Value Rank of 20, i.e. they are a heavily overvalued group.

It could also be argued that earnings today are less supported by strong corporate balance sheets than they have previously been, after $4 trillion of share buybacks over the past…

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