The valuations reached at the market peak in January of 2022 were the highest in history and the 2022 decline only brought valuations back to where they were at the market’s peaks in 1929 and 2000; that is a fact, asserts Kelley Wright, editor of Investment Quality Trends.
Quantitative Easing (QE) may have prevented a global depression in the short run, but the other edge of the blade of that double-edged sword may have perverted an entire generation, or more, as to the function and purpose of monetary policy; that is an opinion.
Prior to QE investors had limits to their speculative impulses. When valuations reached a certain point, or interest rates climbed to a particular area, investors recognized that the risk outweighed the reward and would take profits, or losses, but in either case would raise cash.
QE put an end to the concept of speculative excess. With interest rates at or near zero and repetitive infusions of cash into the market vis a vis bond purchases prudence was replaced with TINA (there is no alternative), and FOMO (fear of missing out). As a result, stock valuations reached their greatest extremes in history.
Had there not been the Covid Pandemic, and Congress had not pushed trillions of dollars into the system, no one knows how long the QE Era could have remained in place without blowing the global monetary system to smithereens. Alas, there was the Pandemic, and Congress did what it did, and here we are.
So, now we have an entire generation, or more, of market participants that believe that all the economy and markets need to return to the glory days of the QE Era is for the Fed to begin easing and all will be well.
That the Fed eased through the bear markets in 2000 and 2008/2009 but markets continued to decline until valuations reached some semblance of value has been forgotten or ignored, but wishful thinking is a powerful force. The inflation genie is out of the bottle, and my opinion again, it isn’t in any hurry to go back in. The Fed messed with Mr. Market and now they have their hands full with the mess they created.
Based on my experience and knowledge of market history I believe this bear market has a way to go before it is over as stock valuations are still at or around the 1929 and 2000 extremes.
To what extent is anyone’s guess, but a reversion to the mean of historical valuations that allow for the S&P to average a 10% increase each year for the next 10 years would suggest a number on the S&P that few could entertain as possible. As John P. Hussman, Ph.D. writes in his latest missive here, “The deferral of consequences is very different from the absence of consequences. My concern is for investors that may discover that the hard way.”
In closing, I see continued pain on the horizon for the economy and the broad market. The piper may have been put off, but the piper will get paid, he always does. Of course, we have survived many a bear market with our approach. Quality and value are constants that always prevail in the long run, and I see no reason why that should change now.
In fact, as prices retreat dividend yields will increase and the ranks of the Undervalued category will swell with an abundance of good values to fill our portfolios with great stocks that have significant upside price potential as well as growing streams of income from dividend increases. The key is to snatch them up when presented with the opportunity.
For example, our Timely Ten list represents our top ten recommendations from the "undervalued" category as of each of our issues. We identify those undervalued stocks based on excellent international economic measures such as return on invested capital, free cash flow yield and price-to-value ratios.
Our current Timely Ten stocks are Cass Information Systems (CASS), Westamerica Bancorporation (WABC), Comerica (CMA), Bank of Montreal (BMO), Robert Half International (RHI), Amgen (AMGN), NewMarket Corp. (NEU), Ames National (ATLO), Unum Group (UNM) and CVS Health (CVS).
