Is the Stock Market Severely Mispriced? With Jesse Felder
Aug 30, 2023
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Jesse Felder shares his outlook on the Federal Reserve and its policies, discusses the mispricing of the stock market based on various metrics, compares the bond market to the stock market and explores the potential impact of a 5% 10-year yield on stock markets. He also talks about the widening deficit in the US and potential inflationary challenges for the Federal Reserve.
The speaker believes that the stock market is severely mispriced, supported by metrics such as the lower dividend yield compared to 30-year tips yield and the higher price-to-earnings ratio than historical averages, suggesting overvaluation and potential risk.
The significant divergence between stocks and bonds, with rising interest rates in the bond market while the stock market does not respond accordingly, indicates potential mispricing of stocks and the continuation of rising interest rates.
Deep dives
The Stock Market is Mispriced
The speaker believes that the stock market is seriously mispriced and provides various metrics to support this claim. For example, the dividend yield on the S&P 500 has not kept pace with the 30-year tips yield, suggesting that stock prices need to fall to raise the dividend yield. The stock bond ratio also indicates overbought conditions in the stock market. Additionally, the price-to-earnings ratio is higher than historical averages, indicating overvaluation. The speaker suggests that the macro indicators point towards a risk in earnings projections, and that there might be a continuation of the earnings recession. Overall, the speaker argues that the stock market is mispriced and poses a potential risk.
The Divergence Between Stocks and Bonds
The speaker highlights the significant divergence between stocks and bonds, specifically in terms of interest rates and yield. The charts show that stocks are diverging from bonds, with interest rates going up while the stock market does not respond in the expected manner. The speaker points out that the bond market's perspective on inflation and interest rates differs from that of the stock market. The bond market suggests that inflation might persist, while the stock market prices in a scenario of low inflation and interest rates. The speaker attributes the divergence to factors such as a supply-demand mismatch in the treasury market and a widening fiscal deficit. This suggests that stocks might be mispriced and that interest rates could continue to rise.
The Paradigm Shift in Interest Rates
The speaker discusses the significant shift in interest rates, particularly in the 10-year Treasury yield. They note that interest rates have broken out of a long-term downtrend, marking a potential end to the 40-year bond bull market. The speaker also highlights the technical patterns, such as a bullish flag pattern, indicating a potential continuation of the upward trend in yields. Supply and demand dynamics, as well as the widening fiscal deficit, contribute to the potential for further increase in yields. The speaker warns that a rise to 5% in the 10-year yield could have significant implications for stock prices, as the stock market has not yet responded to the lagged effects of monetary tightening. They also emphasize the importance of sentiment and the absence of bearish sentiment in the bond market, suggesting that there may be room for higher interest rates.
Jesse Felder, founder of Felder Investment Research, joins Ash Bennington to discuss his outlook on the Federal Reserve and its policies, the impacts of rapidly rising rates on the broader market, and why he believes the U.S. equity market is severely mispriced.