If interest rates continue to increase, the market is in for a very rough time.
COST is about 40 PE right now which implies 2.5% trailing yield. You can get 3.1% on a 10y treasury risk free right now.
Of course equities have growth potential, but also risk, typically the spread between risk free rate and equity yields is much higher.
Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales.
If inflation persists and the 10y runs to even 3.5-4%, could be looking at close to 50% downside. However there are signs that the consumer is likely to collapse within the next 6 months, which should lead to disinflation, but also likely an earnings recession
>> Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales.
This is the scariest thing to me that very few are discussing. Corporate debt is either toxic or nearing it based on the implications of your statement (which I believe to be accurate).
> You can get 3.1% on a 10y treasury risk free right now
I am a noob of how yields work and the math behind the 2.5% . I don’t buy treasury directly but through VUSTX and VUTY. I am actually DOWN, not up. At least that’s what my Schwab portal shows.
I have COST on the other hand, bought prepandemic. I am up at least 20%.
The math is a 100 PE implies a 1% yield. The company could distribute 1% of its value each year to the shareholders in perpetuity. Many started using FCF and PS ratios in recent years, but often this hides the actual profitability of the business. For example, FCF measures typically do not add back equity compensation.. which is obviously highly misleading for tech companies that issue a lot of stock
If a 100 PE company doubles earnings, they will yield 1%, then 2% etc. Of course if they don't pay dividends then this yield is "theoretical", but its the fundamental basis of how to price equities.
Coke (KO) which is a fairly stagnant company is at a 30 PE, while GOOG is at 20. It seems to me that most fund managers these days haven't lived in a time where valuation matters... everything is vastly mispriced for the most part. There are pockets of fair value though, but buying a broad index is a pretty bad idea right now, IMO.
In terms of bonds, they have a market value, but the yield is guaranteed (assuming the issuer doesn't default). If you buy a 1yr bond yielding 3%, and the issuer doesn't default, you will get a 3% return by the end of the next year. It doesn't work the same for bond funds, but this is how it works for individual bonds
Tip: Don't buy bond funds (mutual and ETFs). Buy the bonds directly, then hold to maturity. This will give you the yield-to-maturity that you are seeking.
The market value of a bond will decrease, but the yield at purchase is locked in. But bond funds are different because they are constantly rolling money into new bonds, rather than just buying and holding a given set of bonds.
That depends on whether you want to sell your bonds or hold on to them and enjoy the coupon payments. If its the latter the falling price of the bond is not relevant to you. You can still get hurt by inflation, default, changes in tax laws etc. If you have the spare cash, you could buy the older bond issues on the dips induced by rising interest rates. That's a pretty decent strategy because these old bonds are those that are going to mature sooner, lower the time left, less sensitive are their resale value to further interest rate hikes. This leaves you with the option of selling them without much financial harm in case you are in a situation that you have to.
On the other hand, real yield is barely 0% and both nominal and real yield curves are still positive and in fact steepening. E/P should be compared to the real yield.
COST is about 40 PE right now which implies 2.5% trailing yield. You can get 3.1% on a 10y treasury risk free right now.
Of course equities have growth potential, but also risk, typically the spread between risk free rate and equity yields is much higher.
Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales.
If inflation persists and the 10y runs to even 3.5-4%, could be looking at close to 50% downside. However there are signs that the consumer is likely to collapse within the next 6 months, which should lead to disinflation, but also likely an earnings recession