Here Are the Two Major Things Distorting the Market
Unsustainable fiscal deficit spending and AI enthusiasm is powering the market to extreme valuations.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Stocks powered to all-time highs last week as the central bank cut the federal funds rate by 50 BPS on Wednesday for the first time since 2020.
We are in uncharted territory here, as the Federal Reserve has never cut rates before when both equities and residential real estate values are at all-time highs. In addition, the market-cap-to-GDP ratio is now over 200%. To put in perspective, this ratio was just under 155% at the tail end of the Internet Boom, before the market cratered.
I am finding very little in the way of bargains these days. Stocks that should be selling at 15- to 20-times earnings are going for 30-times earnings. As I stated in my column on Friday, I am having a hard time fathoming how the home-building sector is trading at 2.3-times book value.
There are two major things that I believe are distorting the economy as well as the markets, making it difficult to get a good feel for either.
The first is the massive amount of fiscal deficit spending that has occurred over the past couple of years even during an economic expansion. This is approaching 7% of annual GDP and comes at a time where the U.S. is already running at its highest debt-to-GDP ratio in its near 250-year history. The bond vigilantes that so terrified James Carville in the 1990s have been in a deep, deep hibernation for many years now. If and when they return is anybody’s guess. Neither party seems like they have any desire to even begin to confront this existential threat.
The second is the AI revolution which is, granted, a genuine paradigm shift — perhaps as significant and far reaching as the birth of the internet in the 1990s. However, every paradigm shift tends to go like this, whether it be the birth of the railroads, that of electricity and the dawn of the automobile, from radio to television, to the internet, even to that of the transition toward electric vehicles. A boodle of cash is raised and invested in scores of startups. A bubble forms and eventually implodes. At that point, the wheat, such as Amazon (AMZN) and Tesla, Inc. TSLA, emerge to dominate their sectors while the chaff such as Webvan WB, Pets.com and Fiskers is allocated to the dustbin of history.
I am sure the same path lies ahead for the AI revolution, but it is impossible for me to tell what inning of this ball game we are currently in. What I do know is that the market is extremely extended by almost any valuation metric that an investor cares to employ. With unsustainable fiscal spending and enthusiasm around all things AI being two core drivers of the market, one has to believe it is truly "different this time" around to believe this is an advantageous time to throw caution to the wind and invest aggressively.
Therefore, I continue to be cautious and to deploy new capital into the market almost exclusively via covered orders around the few stocks I am finding that sport reasonable valuations and have decent prospects. I also have a good portion of my portfolio in short-term treasuries. This allows me to generate decent returns while waiting for some rationality to return to the markets.
At the time of publication, Jensen had no positions in any securities mentioned.
