Esteemed guru Barton Biggs thinks the market has past its “puke point” and will be in a trading range for the rest of the year. Bearish George Soros is wrong, Barton says. And so is Jeremy Grantham. Core inflation will remain high but not horrendous (3%-5%). US stocks are the cheapest major asset in the world.
[Uh oh. There’s that relative valuation thing again. US stocks may be cheap on a relative basis, but they certainly aren’t cheap on a cyclically adjusted PE–which is one of only two valuation measures we are aware of that has been shown to have predictive value. The other being Tobin’s Q.]
Barton in the WSJ:
Mr. Biggs: Conventional wisdom is that the market will test its lows, and go lower again. A really serious bear like George Soros thinks we’ve seen just the first part of the bear market. I’m nervous, but my intuition tells me that after this consolidation is over, the next move will be up, not down.
Psychology is involved here. I like the fact that the market is worried. I like that The Wall Street Journal runs articles about that. That’s all good. But the puke point has been reached, in March. Because of the problems we’re living under, the market should be in a trading range for the rest of the year, between 1250 and 1550 in the S&P 500.
Right now we’ve had a classic bear-market rally. The market has recovered 50% of the ground it lost since January. A lot of good things are happening in the world. Since 2000, operating earnings for the S&P 500 are up 63% and dividend yields up 86%, while 10-year Treasurys have dropped from 6.2% to 4%.
WSJ: What current financial factors would propel an upward market move?
Mr. Biggs: If the Federal Reserve has made its last rate cut, that’s bullish. After that has happened in the past, the market on average was up 5% after three months and 12% after six months. The price to be paid for this — it saved the U.S. banking system from subprime peccadilloes — is more inflation. But it won’t be catastrophic, 3% to 5% in core inflation.
Meanwhile, we are close to the bottom in terms of new-home sales and construction. That’s a definite plus for the economy.
Then we have a huge amount of liquidity on the sidelines, waiting to be invested. It has been increased by all the buybacks. Add stock-repurchase money to dividends, and you have a 5.5% yield on invested funds. Incredible.
U.S. stocks are the cheapest major asset in the world. The top 50 stocks in the S&P 500 are cheap. Will you get rich owning those stocks? No. Will you get richer? Yes.
Alas, there’s a fly in the ointment, even in Barton’s happy world: Oil. If the Goldman folks are right and oil’s headed to $200, we’re toast. Here at Clusterstock, we think we’re toast even if oil stays right where it is, but Barton’s optimistic that the petroleum bubble is deflating.
Mr. Biggs: There’s a hyperbolic blow-off in the price of oil. I see no reason for oil to be doing what it is doing. In the long run, meaning in seven or eight years, it will go to $200 per barrel, sure.
But if it goes to $175 in next two or three months, all bets are off. This would be a hard blow to the U.S. and global economies. In the short run, this craziness would be inflationary and very recessionary. Oil rules the U.S. and world stock markets.
WSJ: Which investing areas do you see as the most promising, and the least?
Mr. Biggs: As oil stops going up, technology stocks will go up. Companies have been underspending on tech for the last few years, and that will change. Tech providers will see earnings grow, and so they will outperform the market.
Barton thinks emerging markets are only now in the middle of a 10-year bubble and therefore have a ways to run (he doesn’t address the global slowdown issue, presumably because he thinks we won’t even have a recession in the US). He thinks financials are done for a decade.
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