Stock markets are flashing red

Anthony Scaramucci (aka the Mooch) is upset. Earlier this year, having bravely hitched his wagon to Donald Trump as a member of his campaign’s economic advisory group in 2016, he was convinced that he was about to be offered a plum job. Assistant to the president perhaps. So he arranged to sell his hedge fund business, Skybridge, to HNA, a Chinese conglomerate, for $275m and waited for his phone call. It didn’t come.

Now he is unemployed. He isn’t exactly under a financial imperative to panic. But it probably doesn’t feel good either. On the plus side, he may have got out in the nick of time. His funds haven’t performed particularly well over the last few years, says Vanity Fair. And, if you turn to our markets page, you will see that the signs are not good for the US market as a whole. Other hedge-fund managers have been selling out and closing down without needing Trump as a prompt and that could be a hint that the rest of us should do the same.

Look at the closure of the $7bn Eton Park hedge fund in March. Its manager, Eric Mindich, wasn’t forced to close it by politics or by clients. He just noted that market conditions are “unfavourable”. And so they are. Pretty much every valuation model for US stocks ever invented is flashing red at the moment. That’s true of the usual measures – price to earnings, price to sales, and the cyclically adjusted p/e ratio (Cape) – and true of most of the less well-known ones. Take the Buffett ratio. This takes the ratio of the value of all the stocks listed in the US to nominal GDP. Back in 2001, says US strategist Ed Yardeni, Buffett noted that you should buy when the ratio is 0.7-0.8, but know that you are “playing with fire” when it heads to 2 as it did in 1999. It is now about 1.9.

In short, buy today and you are locking in valuations that only make sense if corporate earnings keep rising as fast as they are now for some years to come, inflation, unemployment and bond yields stay insanely low (in which case stocks still look reasonable value on a relative yield basis – and Buffett himself said earlier this year that stocks are “on the cheap side” for this reason) or Donald Trump turns out to be a political and economic genius.

The first outcome is possible, given that there is a period of moderate global growth on the go at the moment. The last, whatever poor Scaramucci might have thought a few months ago, isn’t looking that likely. I have slightly higher hopes for Theresa May – in this week’s cover story, we look at her manifesto. It’s interventionist, statist, overly tolerant of debt and a little bit mean to business. However, on the plus side, it is exactly as we expected it to be and much, much better than Jeremy Corbyn’s.


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