Apparently Santa came early this year!  Or at least that’s what we’re telling ourselves given that top of our Christmas list every year is “less government”.  So we’re going to choose to look at this Christmas, with about ¼ of the government shut down, as a happy little present and just ostrich out all the nonsense about why we’re actually in a partial government shutdown and how much of 2019-2020 will also be spent in a partial shutdown… 

For the equity markets, however, it has been an absolute bear of a holiday season.  Quite literally:

¡Olé!

The annual Running of the Bulls was held in Pamplona last month, in a tradition that dates back to at least 300 years before the signing of the Buttonwood Agreement (the precursor to the New York Stock Exchange).  Not to be outdone, Wednesday of last week saw a celebration of sorts for our own “running of the bulls” - the longest bull market in history for stocks, at 3,453 days and counting.

Bull markets are, somewhat ironically, defined more by what they aren’t than what they are.  As long as stocks don’t drop more than 20% from a peak, the bull market keeps running. If they drop more than 20%, the bull market gets posthumously dated to the last peak and all of a sudden you’re in the middle of a bear market.  Or they don’t get backdated and you have to wrap your head around having lived through a Schrodinger’s cat-esque market that was technically both bull and bear since the last market peak. Not to worry though! As of this writing the S&P 500 has surpassed the January 26th levels to reach a brand new all-time high, so this bull market still has legs.  Probably.

We have carved out some time in between World Cup group stage matches this month to bring you part two in our Price is Right series - how to value stocks.  Those of you wanting a refresher on the time value of money and bond valuation before we move on can find yourselves suitably refreshed here.

Facetiously, stocks are worth what someone is willing to pay for them.  Unlike bonds, there is no intrinsic starting point for valuing stocks.  With bonds, you get your money back at maturity (hopefully), so it’s fairly straightforward to use that as an anchoring point and work backwards to a reasonable valuation.  Stocks, on the other hand, have neither a maturity date nor an expected future price, which makes them more or less impossible to actually value. Not really kidding about that. There are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuations.  If you want to make the big bucks on Wall Street, you go work for an investment bank and spend all your time trying to figure out how much companies are worth.

But saying “whatever, it’s all made up anyway” two paragraphs into a note isn’t particularly satisfying.  So let’s take a look at common methods of valuation, and then we’ll see if we can learn anything about what those methods have to say about current stock market valuations.

If you’ve never spent a Sunday watching Antiques Roadshow on PBS, your life is missing something.  Especially the British version of Antiques Roadshow. The gist of the show is that a bunch of appraisers travel around and set up shop in various small towns here and there, and then people bring all of the stuff that has been lying around their attic for the last 25 years to see if it’s worth anything.  

It has even spawned its own hilarious meme.  At its core, Antiques Roadshow works for two reasons: one, it’s a big play-along treasure hunt so that everybody can be a couch Ray Dalio (fun fact: not only does Ray Dalio run the world's largest hedge fund, his submarine just found a $17B shipwreck treasure); two, it answers the age-old question of “that’s worth how much?” that has also fueled such long-running classics as The Price is Right and House Hunters.

In this month’s note, we are going to try and answer the question of “that’s worth how much?” with regard to stocks and bonds, a long running soap opera that’s on from 9:30am to 4pm daily (weekdays, anyway.  That aren’t federal holidays.)