Yes, yes, stocks look cheap.
Pimco’s Bill Gross agrees. In his latest investment outlook, Gross refers to both the P/E ratio and the lesser known Q ratio - the value of the stock market relative to the replacement cost of net assets - as inferring exactly that. The FT’s own Martin Wolf believes the two indicate opportunity too.
Note the charts below:
All that said, the old rules no longer apply says Gross. As he explains (his emphasis):
We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. Welcome to a new universe stock market investors! In this rather “sheepish” as opposed to “brave” new world, here are some considerations that may affect Q ratios, P/E’s, and ultimately stock prices for years to come:
My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to — that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.
So strip out all the debt, helpful tax rates and cheap financing - valuations suddenly look very different indeed. Mind you, Gross is not calling 5,000 on the Dow just yet. His point is only that until the extent of government asset support is fully ascertained - where the Dow ends up is anyone’s call. He makes a fair point. And, as he concludes:
One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.
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