“The world is full of bubbles,” warns former fund manager Richard Breslow but that shouldn’t stop you from buying ’em. In the latest capitulation of a former realist, Breslow’s confessional clarifies what many, many market participants clearly believe (and what Goldman called “unusually bullish”), “The reality is, you don’t have to like equities to buy them. And that will remain true until it isn’t. For now, beauty is in the eyes of the holder.”
“Almost there. S&P 500 price to sales ratio is just 4% from March 2000 peak.”
Another day, another set of record prices in global equity markets. But trust me, they aren’t doing it with the sole purpose of vexing you. How they are trading is logical and explainable. And I’m not saying that to irritate you either. It’s just that you can’t look at the current valuations and then reread Graham and Dodd in hopes of a simple explanation.
To make matters worse for those who don’t trust this market, you needn’t be a hopeless optimist, oblivious to geopolitics, overly complacent nor stupid to keep piling on.
Even allowing that corrections are, of course, inevitable, you can’t accurately predict when they’re going to happen.
The most simple explanation will also be the least satisfying. The market keeps going up and quant models and passive index funds don’t care why, just that it is. And they choose to or are forced to keep participating. Breadth and volume and all other sorts of arbitrary measures come and go into focus over time. But as factors in a model they eventually get downgraded and become part of the error function. Putting continued emphasis on them is a subjective decision not based on current statistical proof–in today’s world. Models understand what a definition of a trend is, they aren’t at all bothered by measures claiming overly bought or sold levels.
And this is especially important because if there is one additional characteristic that separates this trend from many of those in the past, is it isn’t driven by get-rich quick schemes. Quite the opposite. If it were, many fewer people would suffer such pain every time we go higher. This is classic supply and demand.
Sovereign wealth funds have been gobbling up stocks at an increasing rate. They are classic long-term, buy-and-hold investors. So each quarter when you see their reported equity holdings bulge some more that represents shares not available for you to take off their hands. Add in stock buybacks and comfort with added leverage at these silly interest rate levels and you realize that the percentage of “hot money” to the overall size of the market continues to shrink.
Even if you do think the world is full of bubbles, fund managers have to pick what passes for relative value in this environment. You could talk yourself into believing the equity story whether you hate or love bonds. That’s the beauty of healthy debate. Or fishing for the answer you want. Same for credit.
And when charging fees, you have to try to be invested. A phenomenon that is being exacerbated by the shift to passive versus active funds. A rotation that is only accelerating and now, with added regulatory encouragement as MiFID II approaches.
Breslow concludes by succcinctly summing the status quo up perfectly:
“The reality is, you don’t have to like equities to buy them. And that will remain true until it isn’t. For now, beauty is in the eyes of the holder”
But it’s not like some investors aren’t worried…