After his brief experiment with technical analysis (well, Killer Waves) uber bear Albert Edwards returns to more familiar ground in his latest Global Strategy Weekly.
Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
Edwards says those who take reassurance that the current 12-month forward S&P 500 PE of 10.5 times is cheap are fools, because earnings have peaked…
… and a third post bubble-recession is looming as are single digit PE’s.
Those who do not believe this can happen are still choosing to ignore the reality that has unfolded before their eyes since 2000. In phase 3 of the Ice Age we would apply a 7-8x forward multiple to recession-depressed forward earnings of say $70-75/sh. That gets us pretty close our 400 S&P target. Unbelievable and ridiculous? They said that about our 1½% US T-Note forecast this time last year!
And it’s the same story for Europe, where equities could also fall a long way reckons Edwards.
The rout over the last couple of months in European equities may have been a lot worse than the US, but it has merely taken us back to the forward PE seen at the markets nadir in March 2009 albeit lower at 7½x v 10½x on the S&P. But add in the recessionary impact on profits which have already begun to decline and European equity prices might fall a lot further yet, producing probably the buying opportunity of a generation.
Something to look forward to, then.
Related link:
Edwards says this has nothing to do with that downgrade – FT Alphaville