Valuation Inflation

The Market in a Dozen Charts
Where Is the Breadth?
The S&P 10 versus the S&P 490
If That Was a Bubble, What Is This?
Extra Cash
Enter Robin Hood
Triggered Market
Coping with COVID

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

—Benjamin Graham

You may have noticed a bit of manic activity in the stock market. You may have also noticed inflation (as measured by various government agencies) is quite low, despite a supply interruption in numerous goods and services.

These aren’t separate events. Both are consequences of the pandemic. Specifically, they result from the government and central bank response to the pandemic. As necessary as their actions may have been, they have side effects, many unintended and some of which will not be known for years. These hastily conceived programs have even more side effects than usual.

I think we actually have high inflation, but due to these side effects it is showing up in stock prices instead of consumer prices. I believe this, not V-shaped recovery expectations, is the main reason stocks are up. Today we’ll explore why this is, and how investors should respond.

This letter will be different than usual. We’ll start with a dozen or so charts showing the market is either very highly valued, or extremely overvalued, or merely stretched. But in general, you will see markets are indeed at the upper end of historical valuations.

Then we’ll consider some reasons why this is so, and why stocks could even go higher. Every previous recession had an accompanying equity bear market, often quite vicious. Why not this time? That is what we will try to answer.

I sent a note out earlier this week to my friends asking for their favorite valuation charts. Let’s look at what they sent plus what crosses my desk in a normal week.

(Warning: Printing this letter will take more pages than normal as charts take room.)