5 Things We Learned This WeekSubmitted by Silverlight Asset Management, LLC on November 15th, 2020
November 15, 2020
Equities rallied on positive vaccine news and the S&P 500 finished this week +2.2%.
News broke Monday that an early analysis of Pfizer and BioNTech’s vaccine proved 90% effective in protecting people from COVID-19. A widely distributed and effective vaccine is the key catalyst many investors are looking for to ignite a post-pandemic economic recovery. Monday’s news made this outcome a more realistic probability.
The positive vaccine news also triggered enormous factor volatility under the market's surface. According to JPMorgan, Monday saw the strongest one-day rotation to Value stocks since 2008. We see the rotation to value-oriented securities as a durable theme into 2021.
This week, each of our profile stories relates to the concept of value.
Value Investors Should Think Globally
Leadership in the markets changes hands a lot over time. So whether you’re looking at value versus growth, small versus large, U.S. versus foreign, or stocks versus bonds, it’s a constant exercise in appraising relative value. Today, we see better value in international equities relative to the U.S.
The U.S. leadership cycle is already mature at 12+ years. No country, sector or style permanently outperforms. If the opposite were true, investing would be easy and everyone would be rich.
Second, valuations are stretched in the U.S. relative to the world. Analysis from Gavekal Research shows U.S. forward P/E ratios tracking well above countries like Australia, Japan, the U.K., and numerous Emerging Markets with strong secular growth prospects. This analysis considers expected changes in inflation, growth, and tax rates for each country -- all important factors to appraise ‘real’ value.
Comparing Relative Value: Equities vs Bonds
Asset classes compete for investor capital. One magnet that always attracts capital is a strong risk-adjusted yield.
Understanding bond yields is easy. The 10-year U.S. Treasury Bond currently pays 0.88%. What you see is what you get.
Equity yields aren’t as well-understood, but they’re also very easy to calculate. All you have to do is flip the P/E ratio of the stock upside down, which is calculating the stock’s E/P (earnings yield). The current P/E ratio of the S&P 500 is about 35x. If you flip the P/E, 1/35, you get a yield on the S&P 500 of 2.8%.
Comparing the value of stocks versus bonds in this case means comparing 0.88% to 2.8%, which is not overwhelmingly impressive for stocks. Remember, investors also need to put a value on the extra risk of owning stocks versus bonds, which may not be worth the 2% spread.
What’s more, bond yields probably have further to rise. The Federal Reserve’s bond buying program is making the 10-year bond yield appear artificially lower than where the real economy would put it. Stocks are still the more attractive asset class, but growth investors should not be complacent about rising bond yields as a valuation risk.
Rethinking The Value of College
Studies show college graduates earn 70% more than those with just a high school diploma. Education is invaluable.
But it is also true that many college grads are saddled with a lifetime’s worth of debt, and marginally higher median incomes aren’t doing enough to boost net worth over time. Because of tuition’s parabolic rise, and the growing economic need for highly specialized skill sets, the return on investment for traditional college education is falling.
Fortunately, the market may be addressing some of the value imbalances. More schools are offering larger tuition discounts to counter lower enrollment and to compete with the faster, cheaper, highly specialized training many students can turn to for targeted job opportunities.
Coding boot camps churned out 30,000 graduates last year, and companies like Google, Apple, and Microsoft are all launching vocational training courses that offer paths to well-paying tech jobs.
Many are rethinking the value tradeoff of high-cost traditional colleges as compared to cheaper, faster, and highly targeted vocational training.
Comparing The Relative Value of BMW and Tesla
Tesla is all the rage when it comes to electric vehicles. But they’re not the only game in town, and the stock appears stunningly overvalued.
Tesla shares trade at a price-to-sales multiple of 13.3.
S&P 500 trades at a price-to-sales multiple of 2.7.
BMW shares trade at a price-to-sales multiple of 0.5.
BMW is developing its own fleet of electric vehicles that will no doubt be stunning. It’s German engineering, after all.
There appears to be relative value in the automotive sector at-large, and particularly those that sell well in China. Autos lead in the early part of economic cycles and China is setting a goal to have 20% electric vehicles in the next few years. As a luxury auto brand that performs well in China, BMW checks some of these key value boxes.
Studying the Value of Economic Lockdowns
Ever heard of the term “epimacro”? Us either, until now.
Epimacro is shorthand for economic epidemiology, which to date has been a largely esoteric field of research. Its stock is rising.
According to the Wall Street Journal, “the joke doing the rounds is that the only thing with a reproduction rate greater than the new coronavirus is epimacro research about the new coronavirus.”
Indeed, the multi-trillion-dollar question as it relates to the pandemic and the economy is whether lockdowns are worth it. That’s what everyone wants to know, and what is being debated across America all the time. Is a lockdown’s value to public health and consumer behavior greater than the economic value lost in the process? Or is there a better way to balance the two outcomes?
We don’t have any of the answers yet, and feelings about lockdowns are still based more on personal and political feelings than they are on hard data. More research, cost-benefit analysis, and epimacro studies will help us better understand the value trade-offs of certain courses of action. Hopefully, we can make better, more targeted decisions next time.
Acknowledge the Value of Good Friendships
“A good friendship is a wonderful antidepressant,” says psychologist Janice Kiecolt-Glaser, director of the Institute for Behavioral Medicine Research at the Ohio State University College of Medicine in Columbus. “Relationships are so powerful, we don’t always appreciate the many levels at which they affect us.”
In a 2015 study that compiled data on over 3.4 million people across 70 studies, researchers found that the absence of social connections could carry the same health risk as smoking up to 15 cigarettes a day. Being lonely may be worse for us than being obese, the study found.
Friends bring us joy, companionship, empathy, and in many cases, can influence us to take better care of our health – whether via exercising, sharing healthy recipes, or keeping our sanity in check when the world brings all kinds of uncertainties (we’re looking at you, 2020).
This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. Silverlight Asset Management owns shares of BMW in separate accounts that are professionally managed for private clients. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.