Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Fed Policy Shift Ahead? Investors Leave Their Heads In The Sand

By Gary GordonStock MarketsAug 13, 2021 12:23AM ET
www.investing.com/analysis/fed-policy-shift-ahead-investors-leave-their-heads-in-the-sand-200598352
Fed Policy Shift Ahead? Investors Leave Their Heads In The Sand
By Gary Gordon   |  Aug 13, 2021 12:23AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Government leaders choose to ignore rising food and energy costs when discussing inflation data. Yet, consumer staples companies do not ignore rising costs. Nearly all of them — Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Kimberly Clark (NYSE:KMB), Tyson (NYSE:TSN), General Mills (NYSE:GIS) — are passing along higher costs to consumers.

Even when one excludes food and energy from the picture, prices in other areas of the economy have moved up sharply. Year-over-year, costs have hit three-decade highs.

Inflation: Core PCE Price Index Chart
Inflation: Core PCE Price Index Chart

One way to offset higher prices in everything from utilities to consumer services is to benefit from asset price inflation (e.g., stocks, bonds, real estate). Unfortunately, a large percentage of people in the economy do not own enough assets to offset an ever-rising cost of living.

For those of us who do own assets, though, it is impossible to overstate the impact of the “wealth effect.” Real estate has been particularly effervescent.

For perspective, consider the mid-2000’s housing bubble peak. Existing home prices leveled out around $230,000. Today? Median prices have not only hit $360,000, but there is very little evidence of a leveling out period.

Single Home Median Prices
Single Home Median Prices

As it stands, year-over-year home prices are up 23%. Even with a 30-year mortgage in and around the 3.00% arena, prospective homebuyers may soon determine that the total costs have become untenable.

What about stocks? Do they still make sense for new dollars?

Consider the relationship between Peak Price-to-Earnings (P/E) on the S&P 500 with 10-year forward returns. As of July 30, forward returns are projected to be roughly -2.5% annualized for the next decade. (See the purple box below.)

S&P 500 P/E Vs 10-Year Forward Returns
S&P 500 P/E Vs 10-Year Forward Returns

Naturally, Peak P/E is not a perfect metric. Its predictive power is roughly 84%. One might even argue that we could see 5% annualized returns across the next decade if the metric experiences its largest ever error in 80 years of data. (See the green arrow above.)

Anyone who finds comfort in the deviation that leads to a 5% annualized projection may wish to recheck his/her premises. Every indicator worthy of note is belching on the hyper-valued stock bubble.

S&P 500 Valuations
S&P 500 Valuations

Another way to visualize the stock bubble? An average of prominent valuation measures demonstrates that participants are investing at a remarkably treacherous time.

Avg. Of 4 Valuation Indicators
Avg. Of 4 Valuation Indicators

Examine the chart above again. Right now, hold-n-hope investors face a greater risk of severe losses than they did in 1929, 2000 or 2008.

To be fair, overvaluation in stock pricing does not imply imminent danger. Yet pricing extremes in financial assets (e.g., stock, bond, real estate, etc.) present vulnerability.

For example, the U.S. Federal Reserve is hoping that inflationary pressures begin to subside. If those pressures prove to be durable, however, then the Fed may have to raise interest rates.

Indeed, inflation could force the Fed to terminate the practice of printing billions of electronic dollars to buy Treasury bonds and mortgage-backed bonds — a policy that manipulates rates much lower than they would otherwise be. And that’s not something investors are prepared for.

Sell-offs can happen slowly at first. And then all at once.

Some may already be losing the faith on the hottest tickets to ride. For instance, the multi-billion dollar ARK Innovation ETF (NYSE:ARKK) has been dealing with net outflows.

ARKK Net Inflows
ARKK Net Inflows

Imagine what would happen to the never-say-die NASDAQ if this trend continues. You may begin to see sizable losses for Tesla (NASDAQ:TSLA), Zoom Video (NASDAQ:ZM), Square (NYSE:SQ), Shopify (NYSE:SHOP) and other “disruptors.”

Fed Policy Shift Ahead? Investors Leave Their Heads In The Sand
 

Related Articles

Fed Policy Shift Ahead? Investors Leave Their Heads In The Sand

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email