This article was penned by CAPIS

 

Last week CAPIS held its November research call, featuring Nicholas Colas and Jessica Rabe, Co-Founders of DataTrek Research. DataTrek is a New York-based independent research service providing unbiased data analysis, helping investors make the investment process more profitable, robust, and efficient.

 

Click here for a video of the research call

Colas and Rabe’s presentation addressed the following topics:

 

U.S. Equity Valuations (3:22)

Colas opened saying U.S. equities are “super expensive,” explaining U.S. equities are trading at 19 times earnings. (3:58)

Currently, the Case Shiller Price/Earnings ratio is at 40 times earnings – extraordinarily high compared to its average of 17. The last time the CS ratio hit 40 times earnings was in 1999 during the dot-com bubble.  (4:25)

Valuations, while high, make sense. S&P 500 net margins are holding around 13%, above the average of 10% to 11% — “wildly higher than any other point in history.” The normal range is between 7% and 9%. These levels are sustainable. (6:25)

Part of the reason is the heavy weighting of Big Tech companies (FAANG, Tesla, Microsoft, etc.) and their higher profitability and reinvestment in their core businesses. (9:22)

Given this cash surplus and reinvestment dynamic, expect Big Tech to engage in more corporate buyback programs. (10:12)

If one cannot handle these persistent high valuations, it could be time to trim back positions. (11:20)

 

Supply Chain Redux (12:58)

The U.S. economy did not witness a “demand recession” and the current supply chain issues are a long-term phenomenon that could last as long as 12 months. Expect Q4 earnings to reflect pessimism as production simply cannot meet demand. (13:27)

The current persistent labor shortage is focused on the service economy. (14:02)

Expect flat holiday spending, which while hurting earnings, won’t weaken margins. (14:34)

 

2022 – The Year the Federal Reserve Moves (16:36)

The Federal Reserve will likely hike short-term rates by June or July by 25 bps as inflation remains stubbornly high. The market is expecting at least two separate moves 25 bps moves, perhaps three, but no large 50 bps moves like in 1994. (17:04)

Expect inflation, as measured by CPI, to remain around the 5% to 6% range for the next 12 months as housing market dynamics and food costs support this level. The consumer, still spending and flush with cash, can handle higher prices that companies will pass on. (18:23)

Big government spending, such as on infrastructure programs, will not affect the inflation outlook due to long-term nature of these programs. (19:10)

 

ETFs and bitcoin (20:23)

From a macro perspective, the only way to describe equity ETF inflows over the last 2-3 months is “amazing.” Weekly inflows have reached $10 billion. (20:33)

Flows had been negative for over a decade, to the tune of $20 billion to $40 billion/month as older people rebalanced their portfolios to have heavier fixed income weightings. (21:06)

Bitcoin ETFs will be difficult for issuers to bring to market due to a lack of definitive closing market price for bitcoin. The SEC wants an “auditable” closing level. (22:06)

 

Employment Shift is Fundamental (23:16) 

People have prioritized how they work and what they want in a post-pandemic world. The one-two punch of record resignations and job openings have proved daunting for U.S. employers to offset. (24:18)

Mask and vaccine mandates, access to childcare, feelings of being overworked and the desire for shorter commutes, all have stymied employers’ hiring ability. (25:10)

Remote working, more of a U.S. phenomenon than a European one, is keeping U.S. office occupancy rates under 40% nationally and approximately 35% in select metropolitan areas. Higher wages can help lure workers back to the cities and workplace but the question remains, will they?  (26:00)

 

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