Are Stocks Cheap, Or Just Another Rationalization?

Are stocks “cheap,” or is this just another bullish “rationalization.” Such was the suggestion by the consistently bullish Brian Wesbury of First Trust in a research note entitled “Yes, Stocks Are Cheap.” To wit:

“The Fed remains highly accommodative, there are trillions of dollars of cash on the sidelines, vaccines have reached over 50% of Americans, and the economy is expanding rapidly. Some valuations have been stretched, but the market as a whole remains undervalued. As a result, we remain bullish and are lifting our targets.”

Yes, it is true the Fed remains highly accommodative, which has undoubtedly pushed asset prices higher. In fact, financial conditions recently reached a historic low, which suggests elevated asset valuations ironically.

Stocks Cheap Rationalization, #MacroView: Are Stocks Cheap, Or Just Another Rationalization?

We have busted the “myth of cash on the sidelines” previously, but this is a “rationalization” that won’t seem to die.

“‘There are no sidelines. Those saying this seem to envision a seller of stocks moving money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.’ – Cliff Asness

Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. Since this is necessary for there to be equilibrium in the markets, there can be no ‘sidelines.’” 

In the last 5-months, more money flowed into equities than in the past 12-years combined. That flow pushed investor allocations to historic extremes suggesting there is little “on the sidelines.”

Stocks Cheap Rationalization, #MacroView: Are Stocks Cheap, Or Just Another Rationalization?

Difference Between Expansion & Recovery

With vaccines reaching more Americans, the economy is indeed recovering. However, there is a difference between an economic “recovery” and an “expansion,” as noted recently.

“The “Economic Activity Index” is an average of the 4-most essential components of organic economic activity. Interest rates have a long historical correlation to economic activity, along with inflationary pressures. Without productivity and business investment, jobs do not get created to support consumption which is ~70% of the GDP calculation.”

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