The S&P 500 stock market appears to be over-valued and could “correct”.
The S&P 500 index is priced at a hefty 30 times its actual reported trailing year earnings. That’s at the high end of its historical range. It has mostly only ever spiked higher than that at times when earnings were unusually low including during the financial crisis and with the pandemic in 2020. It’s now arguably in the “irrational exuberance” zone.
This P/E ratio of 30 should be taken as a warning that the market may be over-valued. The counter argument is that the S&P 500 companies have become more profitable for many reasons and that earnings growth is set to remain high due to artificial intelligence technology and a voracious consumer appetite for lucrative weight loss drugs and anti-aging products among other things.
I have updated my detailed article that delves into the valuation of the S&P 500.
This high valuation as well as the the possible turmoil that could accompany the U.S election and its aftermath are reasons to be cautious. Most investors should probably maintain a mix of equities and fixed income as well as cash. In the event of a market decline, those investors with balanced portfolios and available cash will be in a position to shop for bargains while many investors who are over-exposed to equities may be panicking.
China and India will inevitably (once again) have the largest economies in the world!
I came across a startling claim in the best-selling 2014 book Sapiens by Yuval Harari:
“In 1775 Asia accounted for 80 percent of the world economy. The combined economies of India and China alone represented two-thirds of global production. In comparison, Europe was an economic dwarf”.
Having come of age at a time when India and China had very primitive economies compared to Europe and America, it’s hard for me to fathom that they were – by far – the largest economies in the world at around the time of the American Revolution in 1776. In the history of modern humans, 250 years ago is but the blink of an eye. But in technological terms 1775 was indeed eons ago.
In 1775 when most of the early scientific advances of the industrial revolution were just rolling out in Europe, the vast majority of the population and of the economy involved subsistence production of food, clothing and shelter. Given that, it does make sense that India and China with their vastly larger populations would have had the largest total production and therefore the largest economies. Not the largest per capita, but the largest in total.
The industrial revolution, followed by electrification and many other rapid technological advances along with governance systems that supported free enterprise absolutely catapulted Europe and then America well ahead of Asia both economically and militarily.
But today, India and China have access to most of the same technologies as Europe and North America. Their economic and legal systems are not as conducive to the forces of private enterprise that drive economic growth. But they are conducive enough to allow those economies to grow significantly faster than the economies of Europe and America. I don’t think India and China will match the GDP per capita of America anytime in the foreseeable future, if ever. But, given their vastly larger populations and their increasing modernization, it seems absolutely inevitable that both India and China will surpass Europe and America in total GDP within a few decades at most.
This is not necessarily something that Europeans and North Americans should fear. Except that it will also likely allow those countries to eventually have the largest militaries in the world. But, for better or for worse, we are more and more in an age of mutual assured destruction and so it is unlikely that India or China would attack the U.S. or Europe. But China could probably eventually take (back) Taiwan with relative impunity.
For investors, the action point is to consider having at least some exposure to Asian equities.
Canada may be headed for deflation
In September the headline overall year-over-year inflation rate was just 1.6%. There was in fact modest deflation compared to July and August in overall prices.
Lower gasoline prices were a main contributor to the 1.6% year-over-year inflation level.
Prices remain far higher than they were several years ago and that will remain the case.
But there is good reason to suggest that Canada might see modest deflation (negative year-over-year inflation) within the next year. Rents which were up a hefty 8.2% year-over-year have started to decline. At some point the year-over-year change in rent prices is likely to be negative. Homeowner replacement costs are a component of CPI that was down 0.4% year-over-year in September. This component could continue to decline.
In Praise of Banks and the ability to borrow
Banks get a bad name. The banking industry is sometimes accused of not producing anything real.
But’s here’s a scenario that explains how banks do contribute greatly to the economy and our standards of living.
Imagine that Frank is a youngish adult who has the type of job that leaves him with a fair amount of free time. And imagine that he has good carpentry and building skills. He did a lot of the work himself in building his own house. And imagine that he is capable of building another house over the next year in his spare time. His acquaintance Joe would like to have a house but has neither the skills nor the money to build or buy a house. Joe does have a secure job and could afford to pay for a house over time.
Frank does not have the money to build a house for Joe and be paid back (with interest) over say the next 20 years. And even if he had the money (such as through an inheritance), Frank is not about to upfront the costs for a house including his own labour and trust Joe to pay him back over say 20 years. So, without someone to lend Joe the money to pay for the land and all materials and Frank’s labour and all the other costs, no house is going to get built. Frank will while away his free time less productively and will not have the opportunity to earn extra money by building a house for Joe.
But luckily, banks exist. The bank lends Joe the money to buy the land and pay all the expenses including Frank’s labour and the result is that Frank uses his free time to build a house for Joe. Joe gets a house far earlier than if banks did not exist. Frank uses his free time in a highly productive way and now has more money to spend. Apply this over many Franks and many Joes and we get more houses per capita and a higher standard of living. Praise be to banks!
END
Shawn Allen
InvestorsFriend Inc.
October 17, 2024