Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
Settling down. Equities calmed down finally. There’s still tension out there but the bulls and the bears aren’t running over each other. Depending on the moment of the day, one camp moved the tape 20ish handles in their favor and then the other camp pushed things back. News was trivial today so we’re still reacting to the reactions. Capital flow was heavy at 147% but that too, is settling down.
Today seemed like it would be another victory for the bulls. The S&P was up for most of the morning and almost 1% at the highs. It looked like the less courageous dip-buyers were jumping into the market after yesterday’s bounce. It didn’t work out that way though and now the dip-buyers, both the brave from yesterday and the timid from today, have to decide their move for tomorrow.
Treasury rates continue to climb so that isn’t helping the bulls either.
I don’t think the market is about to reprice equities at historical PEs, or Price-to-book, or whatever. That would be a big drop in price. I think that the market is re-pricing at non-silly valuations.
What I mean is that the January valuations were silly. In retrospect, I think the market sees that. Now we are trying to find the appropriate level. That doesn’t have to be December valuations either. We could go down more. I think that *in the absence of a major fundamental catalyst* we are going to back-and-forth before finding a valuation range (and price range) that isn’t crazy optimistic.
I still think the coming valuations will be too high (from a historical standpoint) but we are not going back to where we were. According to Bloomberg, we were at these approximate PEs at the highs.
- Trailing 12 months: 23.5
- Current year: 18.4
- Next year: 16.8
- 2 years forward: 15.1
Here’s where we are now
- Trailing 12 months: 22.0
- Current year: 17.2
- Next year: 15.7
- 2 years forward: 14.1
Where do we belong? I don’t know. But the market doesn’t appear to want to reprice at historical averages. It seems like it wants to return to *elevated-but-plausible* valuations. There’s reason to be optimistic about the economic future so I think *some* optimism will remain in the coming valuations.
We shall see.