The stock market is at all time highs. It has run to extraordinary levels.
Stock valuations, in the opinion of this author, are absolutely unsustainable. The S&P now trades over 18x 2018 consensus estimates. 18x future earnings (not current year) is very aggressive in any environment, but especially when the underlying consensus estimates are based on the following assumptions that analysts at major investment banks are now taking for granted:
- Commerce Secretary Wibur Ross’s goal of spiking US GDP from below 1% to 4% will materialize as a result of trade policy that discourages free trade (the author believes that this policy will have the opposite effect and risks a global recession or depression).
- Lower tax rates on corporations and the opportunity of corporations to take advantage of 1-time accounting change will enable them to show real accounting growth from 2017 to 2018. (the author doubts that any of this will get through Congress and questions their effectiveness even if it does).
- Economic, US political and global geopolitical events will not have a dampening affect on companies’ ability to grow earnings dramatically over the next year, or on the ability of US markets to continue to support an 18x PE multiple (the author doubts this too, especially as this type of valuation has never been sustainable over the long term).
I have recommended that U.S. investors maintain a heavy exposure to cash (savings and short-term CDs) to protect against unsustainable valuations and to wait for a better entry point. Now more than even, investors need to apply some historical perspective, and keep strong positions in cash.
I have not espoused the belief that people should be completely unexposed to the stock market, and I myself have maintained a reasonable exposure to US equity markets. Selling out completely runs the risk of being dead wrong and to missing a strong upside.