Valuations? We’re Talking About Valuations?

There is a lot of debate happening right now, largely along partisan lines, about whether tariffs are inflationary.  Market participants in support of the President-elect are loudly making the case that the example of the tariffs of 2018 prove that tariffs are not actually inflationary.  The Fed Staff and the economics team at Goldman Sachs have empirically demonstrated those claims to be misleading at best. The chart below from Goldman illustrates the reality of what happened last time around.  The chart shows that while broad measures of inflation showed little impact, the industries impacted by the tariffs saw meaningful inflation.

"Whether or not you think there will be real NEED for companies to pass through a tariff or not, that is secondary to whether or not they CAN. What the study informs us is that if they can, they will." - Tim Pierotti

In the wake of the recent “Red Wave” election results, one might be wondering if there are any restraints on the incoming administration. Republicans will control the White House and both the House and Senate. The Supreme Court is controlled by conservatives who have expressed an unprecedented view of the “Unitary Executive”. In some regards those concerns may be justified and we are likely to see a White House that is unrestrained relative to history. But when it comes to the economy, this administration will still have to answer to a higher authority: the bond market.

The Postpandemic U.S. Immigration Surge: New Facts and Inflationary Implications, a new working paper from The Dallas Fed answers an economic question that has become a highly political one. Has the significant rise in unauthorized immigration exacerbated inflation? The answer, according to a team of economists led by Anton Cheremukhin, is no, nor has it been disinflationary. In summary, they conclude, “Contrary to the popular view, we find little effect on inflation, as the increase in supply was largely offset by an increase in demand.”

Oil is always the unknowable variable to those assessing the global economy. Perhaps the US and the Saudis will convince Israeli leadership not to attack Iran’s energy infrastructure in the near future, but from my perspective such an event is only a question of when, not if. And when it does happen, it will not be an event, but part of a paradigm shift that could change oil markets permanently.

Stocks, Bonds, Oil, and Gold are all liquid markets that should impart some directional wisdom, but currently, the messages they are sending are not just inconsistent, but contradictory.

We have often made the case that as the housing market goes, goes the US economy. Well that makes the outlook for the economy pretty damn murky given all the conflicting data in housing. We add up the below positive and negative factors and see an economy that is still slowing but not on the cusp of a recession. Ultimately, we still see more buyers than sellers in housing.

"Volatility is clearly rising and that means that investors who have enjoyed the incredible momentum of the last 18 months or so, should manage risk accordingly. While we remain sanguine on our economic outlook, we continue to see the risk/reward in equities as poor. Valuations are high. Expectations for earnings growth are also high at a time of slowing nominal GDP, which suggests that we are going to continue to see negative revisions on Wall Street to future earnings growth. No need to panic, but let’s be careful out there. Stops are always your friend."

"We concede that valuation doesn’t matter until it does. In other words, the fact that the price to sales ratio of the market weighted S&P has only been higher in the telecom and internet bubble of 2000, doesn’t mean that the market can’t go higher."

Will global investors decide if enough is enough?

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