One prominent correspondent this week cited these reasons to be cautious on equities at this point in the cycle:
- Earnings misses: in light of the numerous earnings “misses” last week combined with the plethora of corporate reductions in forward earnings guidance, just how accurate is the consensus earnings estimate on 2007 S&P 500 often cited as the key reason for why stocks are ‘cheap’?
- Inflation: the following have increased on a year-over-year basis: corn (+38.5%), soybeans (+45.5%), wheat (+74.4%), milk (+121.8%), eggs (+167%), and the list goes on. How long before these prices start to show up the supermarket?
- Valuation: The astute people at Gavekal make the following points on the curent climate: “It has been Charles Gave’s lifetime investment strategy to only trade when something is ‘totally abnormal’ (due to market confusion, lack of foresight, market distortion, etc.). As such, we give the most consideration to indicators displaying a net measurement that is significantly positive or negative. Today, our indicators show that a) the ‘very overvalued’ markets are: Australia, Canada, and Germany; b) ‘overvalued’ markets are: France, Hong Kong, Korea and Sweden; c) ‘neutral’ markets are: the US, UK, Japan and Taiwan. Not one of our valuation indicators is registering an ‘undervalued’ signal. As we are now heading into to the summer lull (with lower volumes), approaching equity markets with a bit more caution might make sense.”
