Fund managers

Originally posted by saintex: ↑

Where is the stock market going according to Shiller PE ?

Still large possible outcomes :
- if US 10 year treasury rate go back to their median long term (3.81 %) and risk premium return to their long term average (2.5 %), Shiller PE ratio return to their long term average of 15.9 x (vs 28.8 x now), so it corresponds to a correction of 45 % for S&P 500,
- if US 10 year treasury rate go back to its minimum of 0.6 % (in July 20) and risk premium stay at their long term average, Shiller PE ratio would by 32.2, so it corresponds to an upside of 12 %.

Nothing very new here, it just confirms that the market still discounts a scenario where inflation will be controlled and long term rates will go back to very low level.
Now that central banks (in US, Australia...) think again that it will take more time to control inflation, the risk of a correction is real.
As the best case of a soft landing* is going away, there is not much to limit the risk of a correction :
- US 10 treasury rates are increasing,
- earning estimates are revised down,
- and risk premium are low (risk premium is now negative according to Shiller PE).

We have probably been through a classical scenario :
- first, large increase of inflation following covid, that the market sees as only temporary,
- then the market realise that this is not temporary and begins to panic (2022 until September) as central banks decide to increase interest rates on a large scale,
- then (from October 22) the market plays a scenario of success of central bank policies (rapid reduction of inflation and soft landing).
We are now entering the next phase where central banks understand that it will take more time than expected (to stop inflation by raising rates) and the market understands that the possibility of a soft landing is getting really small (as interest rates will increase longer).

What to play in such a situation ?
As usual, USD seems to be the safest bet.

* great article about soft landing in The Economist last week. They reminded that the best indicator for recession during the past 50 years was the gap between 10 year and 3 months treasury yield. Every time, this gap turned negative, there was a recession. That's the case now.

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Hi @saintex

Agree regarding USD, a good way to profit from this may be using the Betashares leveraged USD exposure (Ticker is YANK on ASX), I have used it in the past downturn and did quite well. Implied gearing is a 2.21x multiple, if the USD rises 5% against the AUD, YANK is expected to move approx. 11%. May be something of interest, I don't currently hold as my portfolio already is quite exposed to USD e.g PAC, GQG & CSL. I also still hold shorts on the S&P500 through BBUS (Betashares leveraged short US hedge fund) although this is not a large allocation. As a side note Tasmanian single malt whisky company Lark is looking quite cheap, their last report was very soft, new CEO arrives in May something I'd like to add to sub $1.50 they were cycling some large one-off sales so wasn't unexpected. Pacific current still remains significantly undervalued, something I'd add to if we see another market selloff.

Cheers,
Plague.