One of the world’s leading experts on valuing stocks has some comforting words for investors shaken by last week’s market carnage.
Aswath Damodaran, a professor of finance at New York University and author of several textbooks on corporate valuation, says the economy is doing just fine. Instead of signalling a new financial crisis ahead, Wall Street is simply ratcheting back to normalcy after a decade of ultralow interest rates.
“What we’re seeing is a recalibration of the market that reflects the fact we’re no longer in that 10-year period of low interest rates, low growth and low inflation,” he said in an interview. “It suggests we may be entering into a more normal period, which is good in many ways.”
To be sure, a return to normalcy may not be entirely pleasant for every sector. Many technology stocks, for instance, are in pain because their lofty prices rest on hoped-for profits that will not actually materialize until many years in the future, if they ever do. Higher rates shrink what those projected earnings are worth in terms of today’s dollars.
However, the market as a whole still rests on solid economic fundamentals, notes Mr. Damodaran, creator of the much-read Musings on Markets blog. “This is not an earnings- or a cash-flow-driven decline. It’s more a reassessment of where rates are headed next.”
Strong economic growth has encouraged the Federal Reserve to boost rates over the past year. But how much higher rates will go depends on how much of the recent boom turns out to be the result of short-term factors, such as the tax cuts passed by Congress last year, and how much reflects longer-lasting shifts in economic potential.
For his part, Mr. Damodaran thinks the U.S. economy is unlikely to maintain a 3-per-cent rate of growth for long. He expects the markets to spend the next year debating exactly how big the slowdown in growth will be.
The process could be unsettling for investors spoiled by a decade of surging profits, he admits. “Could markets panic? Absolutely. But any panic at the moment isn’t coming from macroeconomic forces. The economy is strong, inflation is under control, the Fed is doing what it should be doing. So if there is panic, it’s simply the result of things being so good for so long, and people deciding to take profits.”
Many observers – including U.S. President Donald Trump – are worried the Federal Reserve will raise rates too far, too fast and crush the economy. Those fears are misplaced, Mr. Damodaran argues. In his view, the Fed simply recognizes how fast the economy is growing and how hot inflation is running, and sets its benchmark rate as the sum of those two key factors. The central bank follows, rather than leads, events, he maintains.
“It’s always nice to have a villain in the play,” he says. “But the reality is that rates are rising not because the Fed is putting its foot on the brake, or because it’s choosing to do something absurd, but because economic growth is rising and inflation is picking up. Rates are rising for the right reasons.”
So what should investors do right now? He says no strategy fits everyone, but he suggests those who are willing to sift through the rubble may want to look at some of the international markets pummelled by the recent turmoil.
“Go where it’s darkest, where people are most down on the country. Buy stocks in countries where investors are giving up, and selling everything, good companies as well as bad companies. I’m sure, for instance, that there are some really good Turkish companies that are being beaten up right now simply because they’re Turkish. If you’re willing to do your research, that’s where you are most likely to find bargains.”
He does, however, suggest that investors stay as diversified as possible. “There has been more divergence this year between different countries and between different sectors than I’ve seen in a long while,” he says. “That reflects the fact that we’re in a period of change, of big macroeconomic shifts … the old advice of spread your bets, and spread them widely, is something to keep in mind.”
Ian McGugan