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As stock markets continue their recovery, the struggle against the coronavirus is far from over. Here are a few things worth highlighting to wise investors.

Supremely overvalued stock market

Since the beginning of March, the 12-month forward consensus forecast for S&P 500 earnings has plunged 19 per cent from around US$180 per share to US$143. Slap a normalized 15-times price-to-earnings multiple on that and you get 2,145 as fair value for the index.

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Here’s what that means: The forward P/E multiple (on year-ahead earnings forecasts) peaked at 18.3 times at the end of 2019, was 16.6 at the end of February, and at the end of March – at the height of the angst – closed at 16.3. As of Wednesday’s close, the forward P/E multiple has expanded to 20.5 times.

We have not seen such a lofty multiple in 18 years. The cycle peak in the 2007 credit bubble peak was 15.2 times. Go back into the history books and you will see that barely more than 10 per cent of the time has the multiple been as high as it is today. And we have never, not once, been this high in the context of a recession, even if you believe we are at, or near, the end of a recessionary bear market in stocks. The forward P/E multiple that led to the low in the index in late 2002 was closer to 14 times; it was 12 at the market low in 2009 (similar to the 12-times multiple that flashed the green light ahead of the 1990 trough).

Don’t fret about FOMO

Volatility runs in both directions. If you really would like a picture of what this market resembles, it is 2008-09. Some of the most intense up-days were right in the midpoint of the Great Recession and the very worst thing you wanted then was a “fear of missing out."

Oh, I get this all the time – “but what if I miss the bottom”? Nobody picks the bottom, my friends, not even the best day-traders. In fact, if you miss the entire first year of a bull market, while ensuring you miss all of the bear market, your portfolio is up at a 14 per cent annual rate, based on an analysis going back to the 1950s. How do you like that? If you were that good that you could pick the bottom, well, that portfolio performance is closer to 17 per cent annually. But what a small price to pay to avoid the prospect of the “drawn-out” decline to the fundamental low – just three percentage points a year to avoid the pain of trying to time the bottom.

Avoid bear markets and avoid bear market rallies

In fact, it’s best just to avoid bear markets altogether – staying out of trouble provides you with a total annualized price performance of 17 per cent versus the 7 per cent you get by riding out all bear and bull markets and playing the part of the “buy and hold” investor. The more than 70 million U.S. baby boomers, I can assure you, don’t have the luxury of that long timeline in any event. When real long-term interest rates are as close to zero, as is now the case, the bond market message to equity investors is that much of future expected returns were already harvested in this last cycle of financial engineering. And what’s next is that we are into many years where the major averages will be in a Japanese-style of downward valuation adjustments to this reality. The fundamental bull market is going to be in savings, cash conservation and frugality.

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Bonds have more fun

I don’t think this is universally recognized, but in the past 10 years, the total return for the S&P 500 has been 10.5 per cent at an annual rate and 10 per cent for the long bond (30-year Treasury). In the past 20 years, stocks have returned 4.5 per cent annually, versus 8.4 per cent for the long bond. And in the past 30 years, the S&P 500 has delivered investors a net 8.4 per cent average annual return compared with 9.2 per cent for the long bond. No doubt, there are risks in bonds, mostly from inflation and Fed cycles, to be sure. There always is duration risk. But unlike stocks, Treasury bonds have no capital risk – you know exactly what you’re getting paid upon maturity. That is surely not the case with equities as an asset class. And so, which of the two really did, over time, produce the superior “risk-adjusted” returns?

David Rosenberg is founder of independent research firm Rosenberg Research and Associates Inc.

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