Business Insider reports that Thomas Lee of Fundstrat has turned cautious on equities, after having caught basically the whole rally to date. They claim that a “steadfast bull” is changing his tune, in part because the market multiple “is now higher than it was in 2000 and 2007, just before the last two big crashes.”
I don’t have much of a market view here, but I would like to offer a few thoughts on this story anyway, not all of which are that serious.
First, I like how Business Insider gets a candid of Thomas Lee looking sad, to signify that he is no longer bullish. I am guessing that this guy will be happy or sad based on whether or not he stays right on his market call. I doubt he is congenitally programmed to smile when he thinks equities are about to rise. That all the bulls are just mindless cheerleaders is one of the conceits of the bears, which keeps them warm at night when they have been wrong again.
Second, and closely related, the evidence is still out on whether Thomas Lee is a “steadfast bull.” The story says he is changing his outlook. So maybe he just follows the evidence as he sees it? He is not necessarily prescient, but we might leave open the possibility that he tries to be objective. The idea that only bears can be objective reminds me of Mets fans for some reason.
Third, I don’t know where that reference to the market multiple comes from. Re 2007, the disaster that followed was not mostly about equity overvaluation, I think people would broadly concede. The world almost ended, which made stocks go down.
As for 2000, the claim seems just to be wrong. There are many measures of the multiple and the one I use is obscure. It is the price relative to Shillerized earnings, where the earnings series is operating earnings for the period over which that is available, but discounted by 10% so that it is directly comparable to GAAP earnings which have a much longer history. I am mostly riffing on Jesse Livermore of Philosophical Economics when doing this calculation, although any incremental stupidity in it is my own.
My measure of the equity premium is even more obscure. I compare the Shillerized earnings yield with the real Treasury yield adjusted for my current estimate of the potential growth rate measured relative to its full-sample average. This definitely involves comparing non-commensurate concepts, and I don’t pound the table over it.
But the idea that the earnings yield is the expected return to equities strikes me as a tautology requiring that the earnings yield be defined to generate that result, with the definition allowing no direct measure. And at the other end of the spectrum, the idea that earnings growth and the bond yield should move one for one (a la Euler) is also seemingly wrong.
And I would rather be awkward than to rely elegantly on false priors. Hence my Frankenvaluation metric, which leaves me not saying much.