It’s no great shock that hedge-fund billionaire Steve Cohen is now the free-spending owner of the New York Mets, or that John Henry, the hugely successful commodities trader, fills a similar role for the Boston Red Sox.
There’s a natural affinity between people who like baseball and people who like investing.
Maybe it has something to do with a love of statistics. Many investment pros still revere Moneyball, Michael Lewis’s classic account of how the Oakland A’s built a title contender by trusting in numbers rather than intuition.
Or maybe the sports-investing nexus has more to do with the appeal of a long dramatic arc. A baseball season and a market cycle both proceed at a stately but unpredictable pace, mixing long patches of tedium with sudden squalls of heartbreak or joy. They play with your mind and toy with your emotions.
To help manage my own emotions, I thought it would be interesting to celebrate the start of a new baseball season by compiling a scouting report on how the stock market is shaping up for the summer.
Full warning: Like any scouting report, it involves a lot of projection. But I hope it helps to frame the key question: Are investors headed for a new winning streak? Or steering toward a faltering finish?
Price matters
Baseball fans know that what matters for most teams is not just how good a player is, but how expensive he is. A modestly paid up-and-comer can offer substantially better value than an aging and expensive superstar.
Right now, the global stock market’s aging and expensive superstar is the United States. While Canadian, British, Japanese and European stocks are selling for 10 to 14 times their forecasted earnings for 2023, U.S. stocks are trading for nearly 19 times.
In their defence, U.S. stocks have been the runaway stars of the past decade, far outpacing their international rivals. But investors may want to ponder whether they can keep on performing at a level that justifies their rather lavish price.
Streaks rule
Baseball is famously a game of streaks – such as Joe DiMaggio’s unforgettable 56-game hitting streak. Markets aren’t that much different.
One of the great streaks in economic history is the nearly four-decade-long fall in interest rates from the early 1980s to a year ago. As interest rates and bond yields tumbled, stocks looked increasingly attractive and share prices took off.
Now that streak has ended, with central banks hiking rates aggressively in recent months. Is this the start of a new streak of persistently higher interest rates?
Maybe so. Larry Fink, chief executive of BlackRock Inc., the giant asset manager, recently wrote that he believes inflation will persist and “stay closer to 3.5 per cent or 4 per cent over the next few years.”
If so, interest rates are unlikely to fall any time soon. That will mean a tougher environment for stocks.
Pop-ups don’t stay up
The pandemic was great – from the perspective of corporate bottom lines. Earnings rocketed higher as companies seized the opportunity to swell their profit margins at a time when the economy was flush with stimulus money and consumers weren’t counting pennies.
Now that pop-up in profits is falling back to Earth. Analysts have downgraded their expectations for earnings. It’s not clear, though, that they have adjusted them enough.
Analysts’ forecasts for 2023 still point to about 1-per-cent growth in earnings per share worldwide, notes Beata Manthey, equity strategist at Citigroup. She thinks a contraction of around 5 per cent is more likely.
Similarly, Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, argues that “recession and stagflation risks have increased materially” in the U.S. as the Federal Reserve struggles to contain inflation while at the same time avoiding a bank crisis. She argues these risks are not yet reflected in consensus earnings estimates for 2023 and 2024.
Home runs or singles?
There are times when it makes sense for investors to swing for the fences. Those times are typically when valuations are modest, the economy is emerging from recession and central banks are cutting interest rates.
None of those conditions apply now. If anything, the current moment seems to be a time to avoid strikeouts and concentrate on hitting singles.
Ms. Shalett advises investors to remain patient and focus on cash, short-duration bonds and reasonably priced companies with growing dividends.
Ms. Manthey offers a somewhat similar take: She sees global stock markets generating little in the way of enduring gains for the rest of the year and urges a tilt toward defensive, high-quality stocks.
This seems eminently sensible. Granted, it isn’t the most exciting forecast, but as any baseball fan will tell you, the season is long and contains many interesting twists. For now, let’s sit back and enjoy the spectacle.
Ian McGugan