Don’t be fooled by the fact that the monthly U.S. data are beating “expectations” . At the margin, economic momentum is starting to wane in the more up-to-date data. The bounce we saw previously in consumption growth is ebbing. Initial U.S. jobless claims are back rising at a one-million pace over the past two weeks. The latest information on mobility, retail traffic and airline activity has softened, and bankruptcies are mounting.
It’s not even so much about being right. It’s more about the assumptions that are underlying the price action at any given moment in time. And we are back to being priced for perfection and the complacency is a major concern to us. The smoothed cyclically adjusted PE ratio multiple says the same thing. It never did actually compress to a normal recession-trough multiple in March: it briefly touched 24.8x and has since jumped to 30.6x. It is almost back to the 30.7x peak it had in February and the prior peak before that in October 2018 when it was as high as 31x .
The higher they are, the harder they fall. There is no margin for error here and history shows multiples at these levels leave the market exposed compared to when they are at more reasonable or normal levels. It should go without saying that you know we are in a truly abnormal environment when the market in the past was less pricey more than 99 per cent of the time.
Markets? Or governments/central banks?