Wednesday's Market Minute: Don't Overthink It

The U.S. stock market is the most expensive in history, recent sector leadership doesn’t align with the near-term fundamental outlook, and for the first time in 18 months, policymakers are not injecting any new stimulant into the economy. We don’t need an exotic reason to crash – a simple change of attitude will do it.

A lot of people are dismissive of dot-com comparisons today. They say today isn’t like then, because the biggest companies in 2021 rake in a ton of cash and have bulletproof businesses. The first part is certainly true: rank the Russell 3000 by market cap and you’ll get almost the same order as you would from sorting by 12-month EBITDA. That didn’t work in 2000, when profitless companies had amassed huge valuations.

Just about every other metric for gauging market froth hit a record this year. Trailing and forward price-to-earnings for the S&P 500, price-to-sales, median stock valuation, you name it. The only measure that doesn’t set off alarm bells is what’s known as the “Fed Model,” which compares earnings yield to that of the 10-year Treasury. Not exactly comforting unless you think bond yields are staying down.

Exorbitant stimulus from every direction – monetary and fiscal – certainly helped sustain the speculative party of the past 18 months, but it’s not the root cause. The chaotic scramble during quarantine for quite literally life and business-saving technology services created what will likely prove to be one of the biggest periods of inflated asset prices in market history. When economic growth is low, investors pay up for what’s growing. In COVID’s case, economic growth in the entire world nearly went to zero for a moment in time. Naturally, valuations soared for the companies whose future addressable markets suddenly turned into immediate customers.

Sales growth for those stocks -- and the broader S&P 500 – peaked last quarter. The Federal Reserve is now on a path toward withdrawing support. There’s probably more fiscal stimulus coming, but who knows when and how much. Money’s still sloshing around the system, but the growth rate for liquidity peaked in the first quarter, too.

All the major tailwinds that blew the COVID Asset Bubble are now slowing or reversing. The only catalyst it needs to pop is time.