Skip to main content

T2 Asset Management

April 2021 Market Commentary

What in the world? The craziness just continues in U.S. stock markets as the market just grinds higher. Nothing seems to warrant even a small pullback as inflation is beginning to show up and interest rates move a bit higher in tandem. Normally, this would not be a good sign for the markets, and it has been lost on investors that the 10-year U.S. Treasury now pays more than the dividend yield on the S&P 500 Index. As we have highlighted before, the market just keeps pricing in the good news of endless flows of money from the Federal Reserve and the U.S. government. Yes, that is good news for the market, but it shouldn’t be priced in hundreds of times.

Market valuation becomes the biggest story of the current environment as the chart below shows. This chart is the price divided by earnings ratio for the S&P 500 Index for the last 100 years. The biggest spike was the financial crisis when there were essentially no earnings at all. The long-term average is around 15, and we are currently at nearly 44. The point is that the markets are vastly overpricing current economic activity and are setting up for a serious readjustment down the road.

We are certainly aware that the economy is improving. For the month, U.S. Gross Domestic Product (GDP) was up 4.3%, beating estimates of 4.1%. Non-farm payrolls were up by 916,000 beating estimates of 647,000. Finally, retail sales fell 3% missing estimates of -0.5%. Sure things are good, but the news has been priced in many times over and the market is just plain expensive.

This situation has been in place for quite some time, and the market was richly priced before COVID. It is now at a whole new level. However, we have cautioned all along to not take all of your chips off of the table just yet. As long as the Federal Reserve continues to add billions on to the pile, the markets could become even more overvalued. There is nothing that says it has to stop here, but wise investors know when the bargains are done and it might be time to play a little bit of defense.