To repeat again, it seems that NOW valuations do matter. I emphasize ‘now’ because we know for years it did not as valuations never matter in the short term as investors chase growth but does have a direct statistical relationship to long term future returns. But maybe valuations don’t matter because I read this last night in the Jim Grant ‘Almost Daily Grant’s’ that said this, “Here’s Mark Schmehl, portfolio manager at Fidelity Investments, in an interview with the Globe and Mail: ‘Valuation, I find, is a useless tool. If you base your investment decisions on valuation, you are never going to make money.’ ” That works until it doesn’t but I’ll use a line I said years ago, central bankers have an amazing ability of putting beer goggles on investors via ZIRP, NIRP and QE making everything look good and no price paid for assets really mattering.
Here’s a chart of the price to sales ratio of the S&P 500 and NDX 100. Take away this year because of Covid but where we stood in December 2019 was above March 2000 for the S&P 500. Unfortunately my NDX chart only goes back to Q1 2001.
PRICE TO SALES RATIO in the S&P 500
PRICE TO SALES RATIO in the NDX 100
Following the better than expected Q3 GDP report from South Korea this week where growth was down just 1.3% y/o/y, Taiwan and Hong Kong in the region today also reported better than forecasted numbers. Taiwan, helped by China and its tech exposure, said GDP GREW by 3.3% y/o/y vs the estimate of up 1.1%. This follows a drop of only .6% in Q2. Hong Kong’s economy still contracted by 3.4% from last year but not as weak as the expected 5.6% decline. They also got help from China.
In Japan in September, industrial production grew by 4% m/o/m vs the estimate of up 3% led by auto’s and semi equipment. Their unemployment rate held at 3% but the Jobs to Applicant ratio fell slightly to 1.03 from 1.04 and was 1.58 last year. That unemployment rate includes people who are employed but are not working. If you exclude them as employed, it would be 6.2% instead. In October, consumer confidence rose to 33.6 from 32.7 but that was below the estimate of 35. CPI in Tokyo ex food and energy fell .2% y/o/y as expected on a tough comparison as last year saw the VAT hike and includes the discounts to travel. All in, the Asian economies are the standout right now because of their better addressment of Covid containment and much more limited shutdowns that softened the economic downside.
Next week the new Japanese PM is expected to roll out more fiscal spending. Ahead of that, the 40 yr JGB yield (least influenced by YCC), is just below the highest level since March 2019.
JGB 40 yr yield
Even before the newly initiated October selective shutdowns in Germany and France they both reported September retail sales that missed expectations with m/o/m declines for each.
Germany also reported its Q3 GDP figure where it was slightly better than expected with an 8.2% q/o/q increase vs the estimate of up 7.3%. Growth was down 4.3% y/o/y. France beat estimates as well with an 18.2% q/o/q increase vs the forecast of up 15% and down by 4.3% y/o/y. Italy’s GDP number also wasn’t as bad as feared, falling 4.7% y/o/y vs the forecast of down 8.4%. Versus Q2, it grew by 16.1% vs the estimate of up 11.1%. Spain too was better than feared with an 8.7% y/o/y drop instead of 11.8% as expected. It rose by 16.7% q/o/q vs the consensus of 13.5%.
For the entire Eurozone, GDP rose 12.7% q/o/q vs the estimate of up 9.6% and fell by 4.3% y/o/y after the almost 15% drop in Q2. The forecast was for a 7% contraction. Obviously this is all pre newly instituted selective shutdowns.
Also out from the region and after Lagarde spoke yesterday, headline CPI in October fell .3% y/o/y as expected but the core rate was still positive, up .2% as forecasted. Low inflation, aka low cost of living, has allowed many to get by. Imagine in today’s economic environment that one’s annual cost of living was rising by 2% instead. There would be even more economic pain. European bond yields are lower on the economic beats but the euro is unchanged while stocks are slightly higher.