Gluskin Sheff chief economist David Rosenberg.Deborah Baic/The Globe and Mail
David Rosenberg, the widely followed chief economist with Gluskin Sheff + Associates Inc., wants to clear the air: he's no raging bull. It's just that the alternatives to investing in the stock market right now are worse.
Cash, for instance, is yielding next to nothing. The usual place to hedge stock market risk - the bond market - is clearly in the dying days of a multi-year bull market. For evidence of that, he notes that 45 per cent of fixed income markets across the globe have their benchmark sovereign yields below a paltry 1 per cent. Even in dismal economic times, how much further can they fall?
And so stocks, which Mr. Rosenberg turned more positive on more than a year ago as he became less concerned with deflation and more focused on inflationary risks, are still relatively well positioned.
The problem, he says, is that the good times in the stock market have been dependent on the extreme measures taken by central banks.
"To be sure, in this world of relativity, equities stand out. But rest assured that relative valuations have been influenced - dare, I say, distorted - by central bank interventions that have gone global," Mr. Rosenberg said in his Breakfast with Dave newsletter today.
By some measures, those distortions are looking pretty gigantic. Stock prices are trading 1.77 times sales, surpassing where they stood at the height of the tech bubble in 2000 and the highest in 60 years, he notes.
"These valuations only makes sense in the environment we are in - the environment of central banks suppressing the cost of loanable funds at or near zero," said Mr. Rosenberg.
"It won't last forever, but let's all try to understand that valuations are where they are because we have academics at the helm of central banks who largely have no experience in the real world of finance," he explained. Instead, they have "lived their lives in a theoretical bubble and have amazingly still not learned from the lesson of their past misadventures of creating financial excesses because they feel the need to deal with structural issues that actually lie at the door of the Congress and White House.
"The party continues, but down the road, understand...this will likely not end very well."
Investors who want to best position their portfolios at this juncture may want to take heed of Mr. Rosenberg's updated look at sector valuations.
Based on relative and absolute valuations, earnings momentum, and dividend growth, he found the sectors that look best right now in the S&P 500 are technology, energy, financials and industrials. Utilities and consumer staples are screening the poorest, partly because bond yields look to have bottomed and most economic indicators are showing a cyclical pickup in momemtum.
In Canada, his screens have technology, financials and consumer discretionary as the best buys. Consumer staples, health-care, industrials and utilities are at the bottom. He notes that TSX financials are seeing good earnings per share momentum and are priced more attractively than their U.S. counterparts.
Darcy Keith