I spilled loads of ink final 12 months warning concerning the costly valuation of the inventory market.
In doing so, I enlisted the assistance of a few of the sharpest funding minds of the previous 50 years.
- Oaktree’s Howard Marks mentioned that we had been in an “all the pieces bubble.” Marks felt that each one asset lessons (shares, bonds, actual property, and so forth.) had been very costly.
- Charlie Munger advised us that the market was “dangerously costly.” He believed that valuations final 12 months had been much more excessive than they had been through the 2000 dot-com bubble.
- Stan Druckenmiller’s expertise taught us a lesson after I implored readers to keep away from shares with excessive price-to-sales ratios in any respect prices. For these shares, the info clearly confirmed that there was a bubble ready to be popped.
And it has.
My valuation warnings and the smart phrases of those nice buyers have confirmed to be correct.
2022 has been brutal for fairness buyers.
The S&P 500 noticed its worst first half of a 12 months in additional than 50 years.
Disturbingly, although, one other nice trendy investor doesn’t assume that the market is anyplace near a backside.
Are We Solely Midway to the Backside?
The legendary bubble spotter Jeremy Grantham just lately shared his view of the market.
It was not optimistic.
Final 12 months, similar to the opposite nice buyers (Marks, Munger and Druckenmiller), Grantham was bearish on shares.
He, too, was appropriate on that decision.
Now, even after a 20% decline within the S&P 500, Grantham remains to be pessimistic on the place the market will go from right here.
Grantham believes there may be going to be significantly extra ache earlier than this bear market is over.
His reasoning is that the inventory market decline up to now has simply been an adjustment to how shares are being valued.
Shares are happening whereas earnings are holding robust.
Grantham argues that the subsequent leg down shall be pushed by upcoming earnings disappointments.
He expects the all-time report revenue margins that corporations posted in 2021 and early 2022 will begin to shrink.
Shrinking revenue margins equals shrinking earnings.
Given Grantham’s monitor report, his stance is price consideration.
Respectfully, although, I disagree.
There’s some robust proof that may recommend that upcoming earnings aren’t going to disappoint.
Why?
In response to Financial institution of America’s newest survey of fund managers, international revenue optimism is already at an all-time low.
The survey revealed {that a} report share of fund managers are bearish about international company income.
That’s essential to concentrate on as a result of it’s arduous for earnings to disappoint when nearly all of buyers are already anticipating disappointing earnings.
I wouldn’t anticipate fund managers to be pessimistic about earnings earlier than the market takes one other massive leg down.
As an alternative, if nearly all of fund managers are pessimistic about earnings, then unhealthy earnings outcomes are probably already priced into shares.
That might imply we’re a lot nearer to the underside than Grantham thinks.
Maybe earnings would possibly even be much less disappointing than fund managers expect…
To be clear, I’m not calling a backside available in the market.
I strongly consider that making short-term market calls is a idiot’s errand.
As an alternative, my view on the place the market goes is sort of easy.
I hope it retains happening.
As an lively purchaser of shares, I feel there may be nothing higher than having the market go down in order that I should purchase extra shares at higher valuations.
Final 12 months, I didn’t like the worth being supplied in most sectors.
This 12 months, we’re getting some much-better-looking alternatives.
I’m pleased to see a few of the dominant tech shares at engaging valuations… It’s been awhile.
So let’s not fear about what the market goes to do subsequent.
As an alternative, let’s keep targeted on investing our hard-earned {dollars} the place there may be good worth.
That’s what has labored for us previously and can hold working for us sooner or later.
Good investing,
Jody