It’s expensive for bears too
Today there is no surprise: bears are in full control. Short covers for traders pushed Dow up to 12117, and then bears pushed the Dow down to11940, that was where bears stopped for today. At that point, 10Y treasury yield is at about 4.475%, almost all time low YTD. So, it’s very expensive now to buy treasuries for bears with their new money recently made.
One of Briefings.com’s arguments for current correction is that this is also a valuation adjustment.
“The strong performance in the stock market the past four years has been the direct result of sharply rising profits. This was possible because companies quickly raised profit margins when revenue increased. Wages were held in check.
In the years ahead, the percentage of GDP going to wages and compensation is likely to increase. Profit margins will decrease and over a period of time revert to the long-term norm.
This may well lead to a period of historical under-performance for the stock market.
In many ways, it is the counterpart, the leveling off, of the over-performance of the past few years in the stock market.”
So, stocks are no longer cheap any more, neither are treasuries.
Longer term, long-term yield is supposed to be around annual growth rate, in nominal terms. The annual growth rate for US GDP is supposed to be around 5%, while 10Y treasury yield is at 4.522% today.
So for both bears and bulls, what are they going to play after selling stocks?
http://marketreflections.com/ for further info.
The following is from briefings.com
Economic and profit growth has been above long-term trends the past few years. That has led to above average stock market performance. The outlook the next several years is not as favorable. Earnings growth will slow, perhaps significantly. The stock market might under-perform as well.
From 2003 through 2006 real GDP growth was 3.5%. That is above the long-term trend of 3%. Profit growth was well above trend as well, with operating profits in the S&P 500 rising at a 17.6% compound annual rate for that period.
The faster growth in earnings relative to GDP produced a sharp rise in profits as a percentage of GDP. This is reflected in the chart below.
