This morning as I woke up I read the Wall Street Journal article “U.S. Stocks Close at Records” and was disappointed by the content of the piece. Before we get into the content, let me state that I do love the WSJ which along with the Financial Times are the most important publications for investors. But there are 2-3 facts you need to be aware of: 1) A lot of the time the journalists have no clue why something happened (and I’ll show an example further in this piece) and thus look for almost any reason to use in the article and get the job done, 2) Usually there is a quote from a “specialist” who usually is just ‘selling his own book’ and can’t be trusted, 3) News outlets (not the WSJ or FT) structure titles to be clickbait (Bloomberg.com is notorious for this).
The article attributes the rally to economic strength, however, existing home sales fell for the sixth month in a row! Single-family home starts remain below the historical average of 1.1 million homes.
In all fairness, GDP growth has been stronger than expected with the tax cuts pushing the market higher. But is that enough to justify the outperformance of the U.S. versus the rest of the world? While the S&P is up 8%, the DAX is down -8%, the FTSE 100 is down over -7%, the Hang Seng is down -8%, and basically, everyone outside of America is doing poorly.
And while tax cuts have helped profits, the top line (aka sales) has not been rising fast enough to compensate. Below is a chart of the S&P 500, along with Price to Sales. As you see it is near a historical high.
(Source: Bloomberg)
I’m not advocating you should try and time the market or sell all your equities because of the high valuations. I’m simply saying don’t get over excited by cheerleader type articles.
What bugged me about the article, was that it quoted a market ‘expert’ who said that because interest rates were moving higher, people are taking on more risk and thus buying equities. Say what? Really? That’s wrong. Firstly, when interest rates rise, the discount factor used to value equities rises and thus their intrinsic value declines. In other words, they are worth less. Secondly, with the risk-free asset rising, investors may choose cash instead. Fixed income becomes a competing product with less risk than equities. And not only with treasuries, but with any bond. So with a higher yield, an investor may prefer a bond rather than a stock with a volatile return.
Onto the example I promised. I’ll be using Abercrombie & Fitch (ANF) which had results on June 1st. The stock had dropped despite decent numbers. I was long the stock at the time. But the stock dropped so the media had to find a reason. Unfortunately, none of the journalists agreed! Depending on where you read your news you got a different reason. According to CNBC, the stock dropped because “visits to it international flagship A&F stores were still not up to the mark”. According to the Motley Fool, it was because the company said that operating costs would rise 2%. According to the Investors Business Daily, it was trade tensions that would raise the prices for imported clothing and according to Bloomberg is was traffic (note that same store sales were up). So if someone was scared off by all of these excuses what would happen? Well they would have got out at the worst time. As you see in the chart below the stock rallied up to $29. Personally, I held on a sold my position on the move back up.
So basically, the lesson is to take everything with a grain of salt. Both on the negative news and the positive!
