I spilled a lot of ink last year warning about the expensive valuation of the stock market.
In doing so, I enlisted the help of some of the sharpest investment minds of the past 50 years.
Oaktree’s Howard Marks said that we were in an “everything bubble.” Marks felt that all asset classes (stocks, bonds, real estate, etc.) were very expensive.
Charlie Munger told us that the market was “dangerously expensive.” He believed that valuations last year were even more extreme than they were during the 2000 dot-com bubble.
Stan Druckenmiller’s experience taught us a lesson when I implored readers to avoid stocks with high price-to-sales ratios at all costs. For those stocks, the data clearly showed that there was a bubble waiting to be popped.
And it has.
My valuation warnings and the wise words of these great investors have proven to be accurate.
2022 has been brutal for equity investors.
The S&P 500 saw its worst first half of a year in more than 50 years.
Disturbingly, though, another great modern investor doesn’t think that the market is anywhere close to a bottom.
Are We Only Halfway to the Bottom?
The legendary bubble spotter Jeremy Grantham recently shared his view of the market.
It was not optimistic.
Last year, just like the other great investors (Marks, Munger and Druckenmiller), Grantham was bearish on stocks.
He, too, was correct on that call.
Now, even after a 20% decline in the S&P 500, Grantham is still pessimistic on where the market will go from here.
Grantham believes there is going to be considerably more pain before this bear market is over.
His reasoning is that the stock market decline to date has just been an adjustment to how stocks are being valued.
Stocks are going down while earnings are holding strong.
Grantham argues that the next leg down will be driven by upcoming earnings disappointments.
He expects the all-time record profit margins that companies posted in 2021 and early 2022 will start to shrink.
Shrinking profit margins equals shrinking earnings.
Given Grantham’s track record, his stance is worth consideration.
Respectfully, though, I disagree.
There is some strong evidence that would suggest that upcoming earnings are not going to disappoint.
Why?
According to Bank of America’s latest survey of fund managers, global profit optimism is already at an all-time low.
The survey revealed that a record percentage of fund managers are bearish about global corporate profits.
That’s important to be aware of because it’s hard for earnings to disappoint when the majority of investors are already expecting disappointing earnings.
I wouldn’t expect fund managers to be pessimistic about earnings before the market takes another big leg down.
Instead, if the majority of fund managers are pessimistic about earnings, then bad earnings results are likely already priced into stocks.
That could mean we are much closer to the bottom than Grantham thinks.
Perhaps earnings might even be less disappointing than fund managers are expecting…
To be clear, I’m not calling a bottom in the market.
I strongly believe that making short-term market calls is a fool’s errand.
Instead, my view on where the market is going is quite simple.
I hope it keeps going down.
As an active buyer of stocks, I think there is nothing better than having the market go down so that I can purchase more shares at better valuations.
Last year, I didn’t like the value being offered in most sectors.
This year, we are getting some much-better-looking opportunities.
I’m happy to see some of the dominant tech stocks at attractive valuations… It’s been awhile.
So let’s not worry about what the market is going to do next.
Instead, let’s stay focused on investing our hard-earned dollars where there is good value.
That is what has worked for us in the past and will keep working for us in the future.
Good investing,
Jody
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