Calling it believing in “four impossible things before breakfast”, the ever-interesting Financial Times columnist Martin Wolf today tries to debunk the idea that the bear market is over. Coming alongside a front-page piece in today’s Wall Street Journal about the rising excesses of financial services sorts — Ferrari buying, jet leasing, and expensive ski trips are all on the increase — it seems particularly timely.
Premised on, in effect, a species of mean reversion argument, he uses higher multiples and the cyclicality of profits as a percentage of GDP to argue as follows:
- Stocks are expensive in historical terms
- Profitable sectors, like financials, are going to be badly damaged by rising short-term rates
- It is unlikely that falling equity risk premium is going to save anyone, given an implicit long-run cyclically-adjusted implicit real rate of return of 4%
- A higher equity market implies a low cost of equity capital, but expectations about high future earnings growth means a high return on corporate capital — the two have to converge, which means lower equity markets