The S&P 500 is expensive: Its price-to-earnings ratio is nearing the top 20 per cent of its historical levels. History shows that now is not the time to be chasing the excessive price of the index.
The two sectors that are the most expensive are technology and consumer discretionary – they have only been as expensive as they are today 15 per cent of the time in the past. Even financials have been cheaper 70 per cent of the time in the past relative to where they trade today, despite taking a drubbing this year.
By far the cheapest sectors in terms of current valuations benchmarked against their past are energy and real estate investment trusts. Only health care and communication services are basically at fair value.
David Rosenberg: Those betting inflation is going to be sticky are in for a shock
The S&P 500 is one of the most intriguing stock market indexes in the world and contains a wide gamut of high-quality companies. But prices have leapfrogged their earnings potential and all that is left for many of the index’s members now is to wait for profits to grow into their inflated valuations.
Chasing these high-flyers will end in frustration, if not tears. Instead of embarking on a Fear Of Missing Out strategy or momentum chasing, there are other options. There are markets around the world with far more compelling valuations, like the FTSE 100, which trades at a 10 times forward P/E multiple, or in the bottom 20 per cent of its historical valuations. That compares with a far pricier 19 times P/E in the U.S. Meanwhile, the German DAX (11 times) is also in the bottom 20 per cent of its richest valuations ever.
We remain bullish on Japan and India, as these two countries undergo a re-rating of their valuations for appropriate structural reasons. You can also pick up the Hang Seng right now at a rock-bottom nine times multiple or close to where the S&P 500 traded in August, 1982, ahead of a nearly uninterrupted two-decade bull market. Only 5 per cent of the time historically has the Hong Kong benchmark been this inexpensive.
China is obviously a geopolitical hot potato and an economic wild card, but there is a ton of bad news priced in to the Shanghai Composite index. We can see that because its forward P/E multiple is barely over 10 times, which compares with a historical mean of 13 times.
Perhaps emerging markets are too risky for you. And it should be the case that U.S. multiples scare you right now. Much of Europe looks pretty attractive, but it has a central bank making decisions driven by dogma and inflation there is proving intractable. The latest data suggest that the recession that was expected in Europe in the winter is now on its way.
So, the message I want to convey to American investors, in particular, is that one option for deploying profits from the super-expensive S&P 500 is to move funds north to Canada, where the TSX trades at a mere 13 times – in the bottom 25 per cent of all past P/E multiples.
Beyond equities, let’s just say that corporate credit is very nearly as expensive as the U.S. equity market. Investment grade spreads at 117 basis points (the difference in yield between a Treasury and corporate bond of the same maturity) compare with 160 basis points for the long-run average.
High-yield spreads, at 393 basis points, are well below the past norm of 540 basis points. In both cases, spreads were wider more than 70 per cent of the time historically. Yields are attractive, spreads are not.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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