“Don’t fight the Fed” — old Wall Street saying
Even before the coronavirus pandemic cut the pins out of the stock market, stock valuations were, by historic standards, inflated. The measure usually used to gauge optimism in the stock market is its price-earnings ratio (PER)... or the multiplier applied to expected corporate earnings to arrive at a price that one is will to pay when buying any stock ... see: Wikipedia Entry.
Back on February 12th (the market high), the PER was around 18x (24x on trailing earnings ... quite high ... but not a historic high which occurred during the depths of the Great Depression) ... but nevertheless bubbly. And, if the Orangeman is right and we run stocks back up to their previous highs ... combined with much lower earnings impacted by the pandemic ... we well might have PERs in nose-bleed territory.
However, dear reader, there is one fact that is often neglected when warnings about high PERs are clamored. And that is that PERs are inversely related to interest rates. Because of discounting calculations, the lower are overall interest rates (now virtually 0%), the higher is the market PER that can be justified. And if and when earnings recover from the current shutdown, the margin of safety will be greater than it would seem.
So, dear reader, enjoy this stock market rally ... UNTIL you see the Fed start pushing interest rates back up again! Then, unless you can guarantee an explosion in earnings, I would expect the stock market goose to stop laying these golden eggs ... Trump bedamned.
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