'Will the calm in the markets continue?', by Jonathan Boyar
Compared with the first quarter of 2021, when the Georgia Senate runoff elections secured Democratic control of Congress (via the vice-presidential tiebreaker), protestors descended on the Capitol Building, and Archegos Capital imploded, the second quarter of 2021 was tranquil. Jonathan Boyar, CEO of Boyar Value Group, points out to his clients that his calmness was reflected in the stock market, with the VIX (a measure of stock market volatility) ending the first half of 2021 at 15.8. (In March 2020, at the height of the pandemic, that level reached 82.7.)
Nicholas Colas, cofounder of DataTrek Research, notes that during the summer months, when trading desks are thinly staffed, any surprising developments “hit the market harder than they otherwise might... and since volatility and returns have a negative correlation, this dynamic can make for difficult investment environments.” History bears this out, says Akane Otani, writing in the Wall Street Journal: July delivers average gains of 1.6%, but according to the Stock Traders Almanac, historical August returns have been so poor that “August’s a good month to go on vacation: trading stocks will lead to frustration.”
The S&P 500 finished the second quarter of 2021 selling for 21.5x earnings (fwd.) versus 19.2x at the February 19, 2020, pre-COVID peak and 13.3x at the March 23, 2020, pandemic low. Since the March 23 nadir, the S&P 500 has gained well over 90%. By most traditional valuation measures (price to earnings, price to book, price to free cash flow, etc.) the S&P 500 is historically overvalued.
Jonathan Boyar, CEO of Boyar Value Group, says to his clients that investors don’t seem concerned, though, with Investment Company Institute data recording a net $10 billion invested into U.S. stock mutual and exchange-traded funds in the second quarter of 2021. VandaTrack reports that retail investors were especially aggressive in June, purchasing $28 billion of individual stock and exchange-traded funds—the highest monthly total since at least 2014. Reminiscent of the speculative excesses of the dot-com era, more than 10 million new brokerage accounts were established in the first half of 2021, says JMP Securities—roughly the same as in all of 2020! Individual investors have an uncanny ability to pile into the market at its peaks, so we view their newfound enthusiasm for equities as good reason for caution.
Overvaluation against historical averages does not mean investors should avoid equities, because extraordinarily low interest rates make prior valuation comparisons less meaningful. More important, we don’t buy “the market”; we purchase businesses that sell far below our estimate of their worth. It may be especially hard uncovering bargains right now, but we’ve identified quite a few businesses selling at attractive levels even so.