Inflation is ubiquitous. You are seeing it at the gas pump. You are seeing at the grocery store. You are seeing it when you dine out.
Interested in building a patio? An addition to your home? You might be shocked by the cost of lumber.
And it is not just wood. Get a gander at corn:
Or copper:
Indeed, commodities are rocketing. Readers who chose to hedge their equity exposure with commodities this year have been pleased with the results.
Keep in mind, the Federal Reserve’s commitment to digital dollar printing and ultra-low interest rates means that inflation may persist. It may even get ugly. And if it gets ugly enough, the Fed may have to abandon its ridiculously easy money policies.
What could happen to the stock bubble if the Fed is forced to tighten up? Investors may flee stocks en masse.
As it stands, the broader S&P 500 trades at its highest valuation ever, approximately 30 times last year’s profits. It trades near 22 times next year’s profits, a level only exceeded near the peak of the dot-com tech bubble in 2000.
Price-to-sales, price-to-earnings, price-to-cash flow, Tobin’s Q, market-cap-to-GDP, PE10. Hyper-valued stock pricing exists regardless of the valuation model. (And it’s a whole lot nuttier than 1929 or 2000.)
The potential problem with overpaying for stocks in May of 2021? Extremely poor future returns.
Consider GMO’s valuation-based forecasts for the next 7 years. If they’re right, investors will have a tough time making an inflation-adjusted dime.
