Markets in 3 Minutes: Soaring Stock Valuations, But Can't Sell

Watch Markets in 3 Minutes: Soaring Stock Valuations, But Can't Sell - Bloomberg on Dailymotion

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00:00There's a lot of questions about whether or not the market will push back against a HASSET Fed

00:07that could be cutting rates aggressively. What do you make of this debate?

00:12Morning, Guy. I think it's an interesting debate, no doubt. And if you look at the two-year yields,

00:17they tell you a big story. Now, what is priced in by the markets? The markets are thinking that

00:21the terminal rate is going to be 3%. Well, that is possible. And there have been concerns,

00:27as you mentioned, about whether a HASSET will be able to drive a consensus within the Fed

00:32committee. That remains to be seen. But what we can clearly see already is that the

00:37shift of expectations is towards a lower rate rather than 3%. If you look at this September

00:43dot plot, what we saw was five members already penciling in a rate lower than 3%. So there is

00:51already enough people on the committee thinking that we need lower rates, much lower rates than

00:56the markets are pricing in. And if we get the labor market weakness that we have seen in recent

01:01weeks, it stands to reason that they will go probably push rates lower than 3%. But I will

01:08come back to the promise that I mentioned earlier, which is the two-year yield. If you look at the

01:12two-year yield, given the terminal rate pricing, given HASSET's bias, you could reasonably expect it

01:19to trade lower than 3.50, whereas it is not. And that is the market sending out a clear message that,

01:25look, you can have your Fed rate where you want, but you can't have the two-year rate where you want. And

01:30that is the message from the markets that you can't be in defiance of what inflation is telling you. If

01:35your core PCE is averaging 2.8%, as it has been this year, and you've got nominal real GDP growth of

01:43around 2%, where should your two-year rate be? And that is what the markets are telling us.

01:49OK, that's interesting. So does that mean that the extent to which lower rate expectations pushes up

01:55stocks then is limited?

01:58Well, I think that, you know, stocks are on their own path. There's no stopping them. And the consensus

02:04earning forecast for next year is about $300 in the S&P 500. And if you've got $300 in the earnings

02:10basket, what does the P-E ratio mean we're going to be is the key question. Is there going to be a P-E

02:17compression or P-E expansion? Even assuming current P-E levels, you would think that, you know, the

02:22markets are going to go to 7,000 plus. I mean, that looks ridiculous in terms of valuations. And if

02:28I'm a value investor perspective, and, you know, you've got to think that, you know, that's insane. But

02:33that's the world we are living in. And, you know, the traders are saying, it's as though the traders are

02:39increasingly saying, give us a good reason to sell. And there isn't any at the moment. And

02:44that's what worries me a bit about the equity market valuations.