In a week in which the S&P 500 set a record in the midst of a pandemic, it’s fair to at least consider the bottom 495 or so components.
Michael Batnick, the director of research at Ritholtz Wealth Management, points out 94% of the S&P 500
Christopher Pavese, chief investment officer at North Carolina boutique investment firm Broyhill Asset Management, posts a similar chart comparing the MSCI All-Country ex-U.S. index to the S&P 500, which itself is just driven by the technology giants.
Pavese outlines all the uncertainties — including whether there will be a second, or third wave, of coronavirus, how many businesses will fold and whether record stimulus will create rampant inflation or whether the crisis will result in deflation. “What we do know is that we have never seen stock prices at such extremes coincide with this degree of uncertainty. We also know that living in an imaginary world of certainty can create big problems managing money in the real world,” he says in an investment letter.
Pavese says there are about to be the best opportunities in distressed investing in a decade, as he calls the current market unsustainable.
“If markets are trading at half of today’s levels in a year or two, it will seem obvious to everyone in hindsight, that today’s stock prices and extreme divergences were completely unsustainable,” he writes. “The consensus is eager to look past today’s earnings, through to next year’s V-shaped rebound in profits. But we are a long way from anything that resembles normal, as profit margins are likely to remain depressed by revenue shortfalls and incremental costs for years. As a result, today’s stock prices, still levitating near all-time highs, leaves little margin of safety and even less to get excited about.”
