Expensive But Not Overvalued

Published on
January 23rd, 2020
39 minutes

Canadian Banks: “The Anchor That Drags Your Whole Portfolio Down”

Expensive But Not Overvalued

Investment Ideas ·
Featuring Michael Kantrowitz

Published on: January 23rd, 2020 • Duration: 39 minutes

Michael Kantrowitz, chief investment strategist at Cornerstone Macro, returns to Real Vision to articulate his stock market outlook for 2020. Noting ultra-low interest rates, narrow credit spreads, and a record-low level of cyclicality in the S&P 500, Kantrowitz argues that while the stock market is certainly expensive, it may not necessarily be overvalued. He recommends a balanced approach that favors value stocks over growth, cyclical over non-cyclical, and domestic over foreign. Filmed on January 21, 2020 in New York.



  • SJ
    Sean J.
    28 February 2020 @ 20:11
    Oof. This didn't age well.
    • AA
      Andrew A.
      14 June 2020 @ 12:14
      I was scrolling down to write the same thing xD
  • AE
    Anders E.
    24 January 2020 @ 21:22
    Couldn't disagree more...
    • VK
      Viresh K.
      6 February 2020 @ 10:35
      Shame you’re a perma bear
  • TM
    The-First-James M.
    28 January 2020 @ 20:12
    Heard the opposite of much that I get from Hedgeye. Think I'll be sticking with the Mucca and the Hedgeye GIP Quad process.
    • VK
      Viresh K.
      6 February 2020 @ 10:33
      It’s a different process, why would you expect it to be the same??
  • VK
    Viresh K.
    6 February 2020 @ 10:33
    One of the best interviews on here
  • CC
    Charles C.
    2 February 2020 @ 23:11
    very thought-provoking. especially interesting where the comments on the proportion of growth stocks versus value in the s&p 500, as well as how that helps explain current PE ratios. it's great to have viewpoints that are contrary to my default assumption - which is that the market is overvalued.
  • SJ
    Sean J.
    29 January 2020 @ 15:17
    Anyone catch the contradiction on credit spreads?
  • mw
    michael w.
    29 January 2020 @ 04:24
    The fed has no choice but to lower rates. Market will continue to climb.
  • PP
    Peter P.
    27 January 2020 @ 07:15
    Thank you for the outstanding interview. I got a lot out of it.
  • IS
    Ionel S.
    26 January 2020 @ 10:37
    AWESOME! Both of you are fantastic! Thank you and keep doing the good work!
  • TT
    Tungsheng T.
    25 January 2020 @ 18:10
    US is going to lead global recovery? how so? by printing more money and lower interest rate which debases US currency?
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:36
      Full employment, low interest rates, low inflation and capital spending on Tech to start. Not going to be a boom, but US is best positioned with the least secular issues relative to ROW.
    • TT
      Tungsheng T.
      26 January 2020 @ 02:38
      Hi Michael, Thank you for getting back to me. I enjoyed your interview. I am still trying to learn more macro as an engineer who took only one econ class in college. it is very easy and clear to follow your rationale. First, full employment with good paying jobs or just bunch of uber/lyft drivers that struggle hard for living? if most of people are having a good jobs, shouldnt we see less uber drivers? as an Uber driver, they are making around 12 dollars per hour if lucky after all the cost but no benefits like health care or retirement. I spoke with too many Ubers and most of them either cannot find a full time job or the primary jobs aint paying enough. Also, I am doubtful of how government/Fed measures inflation/unemployment? I certainly do not believe inflation is below 2.5%. I think it is much higher than that. at least, i can feel the inflation from my daily grocery shopping. if i am right about inflation, then US are putting 99% of us in few % negative interest already so everyone is trying hard to protect the spending power but isnt that telling you a bubble is about to pop. how gold goes up if demand isn't there? the top 1% is getting start to harvest from 99% of us. US is certainly sliding from the top in demand/supply cycle but not yet reach the bottom yet. China is ready bouncing from the bottom at the cycle. China saved US on 2008 financial crisis. who will save US or willing to pay off debt black hole US creates? I think US is in far worse shape than ever. US borrowed too much from the far future and soon will pay for the price. I would never see a country doing so much stimulus while claiming it is the best economic ever. US GDP is still holding around 2% because of government spending/consumer spending/less importing. NO investment!! all companies are cutting back CAPEX and doing stock buy back like Apple!? where is the next new topic that keep wall street optimistic about the future? 5G topic will soon be realized that the high margin for corporate and low cost to consumer are not realistic. US cannot do cheaper 5G without Hauwei's help. I certainly agree with you that energy sector may be ready for a short term bullish. we are just seeing fictitious wealth from the stock market but 99% of people in US are not getting much from it. Too many indicators are diverging, which makes me believe the so-called great economic is all a lie. Well, hope to see your next interview soon.
    • TT
      Tungsheng T.
      26 January 2020 @ 02:40
      German government is the smartest by the way. No one is too big to fail. "too big to fail" notion is widening the wealth gap between 99% and 1%
  • FB
    Floyd B.
    25 January 2020 @ 23:15
    Excellent content,this is why I subscribe to RealVision,a variety of ideas and views which I decide to use in formulating my investment thoughts. Would like to see Michael and Raoul in a cage match,
  • JK
    Jay K.
    24 January 2020 @ 00:29
    There is no such thing as a "business cycle". It's a made up thing.
    • JB
      John B.
      24 January 2020 @ 01:20
      yup...its a load of garbage made up by macro folks to pretend they can predict markets
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:50
      Markets may be manipulated across the cycle, but there is, and will always be, a business cycle. Neither the great moderation of the 80s and 90s nor QE and NIRP will prevent cycles. Whoever thinks the 80s and 90s were “normal” is greatly mistaken. You had two decades of collapsing interest and savings rates - that’s far from “normal” in the context of history.
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:51
      There is no such thing as “normal” which is why our process treads lightly on regression models.
  • DW
    Dean W.
    23 January 2020 @ 23:17
    Excellent, fact-based opinions. Consistent with some of the non-RealVision commentators I listen to who have made a longer term bullish case for US equities. As long as there's no catastrophic geopolitical events in 2020, it could be another year to continue cautiously buying dips, while keeping your finger near the sell signal.
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:48
      Agree, but leadership should have a more pro-cyclical tilt if PMIs are rising versus falling in 2019.
  • js
    john s.
    23 January 2020 @ 10:13
    where was this interview 4 months ago? now its easy and dangerous
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:46
      I did my first RV interview back October. That was 3 months ago! This was somewhat of a continuation with a great focus on valuation.
  • BD
    Ben D.
    23 January 2020 @ 10:16
    Really good interview between Ed and Michael. for Michael, there was a well thought out thesis and provided good information especially about the PE nature of the S&P 500 today with the shift from lower PE cyclical to higher PE tech orientation. for Ed its nice to have a good interviewer thats able to ask good questions and then let the guest speak about it while also adding relevant observations and data and then letting the guest continue on. one thing i would recommend would be pairing a current guest topic with another idea that is either in complete opposition but has some merit to it or an idea that comes to the same conclusion but different methodologies. Thanks for a great interview michael and hope to hear more in the future and thanks RV for another great video.
    • SD
      Sridhar D.
      25 January 2020 @ 10:59
      I would like to see David Rosenberg & Michael discussing these macro economic data in the same interview.
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:45
      I’d be happy to do a bull/bear debate one day. That said, we’re far from raging bulls. Returns in 2020 are likely to be muted because credit spreads are already so low - an unusual starting point for a PMI rebound.
  • FJ
    Florian J.
    23 January 2020 @ 10:54
    Interesting interview, but i have two points to make regarding his statement that the ism pmi will see an uptick soon. 1) He states that the housing index is leading and points to the fact that housing starts are shooting up. But arent building permits like a leading indicator for housing starts which had a pretty bad reading? 2) He said that new orders to inventory ratio suggests that production will be ramped up mainly due to the fact that inventories are coming down at a faster rate in the last months. But looking at the ISM PMI report, it states that "The index contracted for the seventh straight month at a slower rate". This ratio Index suggests not really a positive outlook. Therefore: -> Building permits lower -> future building starts lower -> causing a future decline in the housing index -> Inventories are not declining fast and new orders are not picking up -> no substantial increase in production. In my opinion 2 out of 3 points for an uptick in the ISM PMI are wrong. Please correct me if im wrong.
    • WG
      Wade G.
      23 January 2020 @ 19:21
      On your point #2, using the ISM "at a glance" table, the direction and rate of change describe from past month to present... I assume that's used for the narrative u quote from above. That means the remark u quote relates to the month over month data. Much simpler if u want to grasp and verify the direction of the ratio to simply compute it and plot it, as he did in the presentation. So in the transcript, pg 13, u can see the last value is calculated correctly, it indeed reflects your point above, but only for the single last month. Seems clear to me, he looks at the ratio graph and feels okay characterizing it as increasing. It's fair enough to me. Can't comment on #1.
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:43
      When I say housing leads the ISM I am pointing specifically to leading indicators of housing - the NAHB index. A YoY point change in that indicators leads PMIs by about 9 months. The rest of the housing data, permits, starts and eventually prices follows suit.
  • TE
    Tito E.
    23 January 2020 @ 11:56
    Don't be so stingey with the heating guys. This poor fella needs to wear a bodywarmer
    • KE
      Kathryn E.
      23 January 2020 @ 19:54
      It's a Patagonia bruhhh
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:42
      It was quite comfortable in there - pretty close to room temperature.
  • WG
    Wade G.
    23 January 2020 @ 19:52
    I really enjoyed this interview, especially the material on business cycle turns, the ISM v Markit PMIs, and various leading indicators (of these leading indicators). Really interesting and possibly useful. I'm not in the business and don't have the databases, but its my understanding there's indeed a zero correlation and r-square between any of the valuation measures mentioned and subsequent 12 mos returns. Got it, can't time the market. But a number of researchers (John Hussman the most prolific I'm aware of) have examined the same relationships with aggregate returns over multiple years. My casual info gathering suggests that the more useful valuation measures start to show "material/useful" relationships at about 7 years, and if u want to maximize the relationships, go out to 12 years (after that, prediction doesn't improve). But for 12 year aggregate returns, the better valuation measures (e.g., Market cap to gdp; Market cap to GVA) correlate above .90, r-squares low to mid 80s. Interestingly, the "Fed Model" has lousy predictive capacity, but why let a little empirical fact get in the way of nice narrative "no bubbles to see here". Anyway, I struggle to juxtapose some of his language regarding valuations here with the broader analyses based on multi-year returns, that he doesn't reference, but assume he's both aware of and would not dispute. Was also thinking it would be cool to get the folks from ECRI and Mr. Kantrowitz together. My impression is they're looking at the same things for the same reasons, but ECRI might be a smidge more cautious.
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:40
      Shiller’s “Irrational Exuberance” book has the 10yr relationship of PEs to returns. I’d argue that’s more a function of a business cycle having averaged about 9-10 years in the past.
  • CL
    Claudio L.
    23 January 2020 @ 23:50
    NASDAQ the most expensive market in the world defined as: " growth story group of stocks with large market caps" but less macro influence and cyclicality than other markets.
    • MK
      Michael K. | Contributor
      25 January 2020 @ 22:39
      It has the LEAST exposure to financial, industrials, energy and materials than ANY other major global index. This makes it more expensive just because of that. Europe has about 50% exposure to those sectors, Canada has 75%, etc. there is a strong correlation between those sectors’ weights in an index and its PE.
  • OC
    Otto C.
    25 January 2020 @ 17:17
    Excellent interview!!!
  • OM
    Owen M.
    24 January 2020 @ 22:08
    I very much enjoyed this interview. Great view points all around. Thanks RV
  • DB
    Douglas B.
    23 January 2020 @ 14:57
    “Pretty much everyone in America has a job”. 😂
    • RM
      Ron M.
      24 January 2020 @ 04:19
      Totally. This is all about jobs. While Michael is likely right that lower interest rates keeps things juiced in the equity markets, the so-called "low inflation" that we have had in housing, food, healthcare and education are at levels that most Americans can't afford to the consumer engine going. We haven't seen large layoffs yet, but we're starting to see some. Aside from all of these sharp metrics and insights, it's always about jobs.
  • BS
    Bevyn S.
    24 January 2020 @ 04:10
    Fantastic interview. Hit on a lot of things I've been noticing and connected a lot of dots. I've been wondering about the markit vs ism manufacturing pmi differences. Interesting take. Bravo!
  • DH
    David H.
    24 January 2020 @ 04:09
    where is the research data that stock prices will continue to increase other than some "castle in the sky" story?
  • KT
    Kai T.
    23 January 2020 @ 23:42
    Great interview, I'd love to see Real Vision have Michael Kantrowitz back again soon. Ed Harrison is consistently a great interviewer.
  • AH
    Andreas H.
    23 January 2020 @ 22:20
    Best Interview since two years, in my top 5 list of all RV Videos! Gosh, have I waited for a bull case that makes 100% sense!!!! Helps me a lot to decide on how I tilt my trading system, growth there has been better in the last 10 years and I was struggeling with the why. THANK YOU!!!!!!!!!!!!!!!!
  • SS
    S S.
    23 January 2020 @ 20:00
    I miss having the summary at the end of the video of the investment ideas like they used to in previous videos. Instead, now I hear the same sales pitch which I've seen dozens of times.
  • Nv
    Nick v.
    23 January 2020 @ 12:23
    Great interview. I like systematic thinking and deconstructing the argument. You decide for yourself at which level you disagree or agree. I would say Michael (and basically every tech investor) under-estimate the cyclicality of Facebook, Google and Amazon. These companies were a literal fraction of their current size in 2008-9. - Facebook revenue in 08 was 272m and estimates for 2020 are 84 bn - Google was 22 bn in 08 and 2020 estimates are 192 bn - Amazon was 19 bn in 08 and 2020 estimates are 330 bn (which is understated due to Marketplace) - Thus FB, GOOGL & AMZN combined sales was 42 bn and now 600 bn (today is 15x 2008)
  • DS
    David S.
    23 January 2020 @ 09:15
    Interesting, but we are in a high risk credit/political cycle which is dominating the business cycle. For me the stock market is simply supply/demand of money flows including buybacks without fundamental analysis. (Why would a bank buyback stock above book value?) Good luck to all. DLS