Juggling Dynamite

Equity prices have made some ‘mean reversion’ progress year-to-date.

At the end of March, the average geometric valuation for S&P 500 companies had declined to 148% from 167% in February (below since 1900, courtesy of Advisor Perspectives). This was the lowest since June 2024, but still, the most expensive in history and three standard deviations above the long-term historic mean.

As of the fourth quarter of 2024, U.S. households and nonprofit organizations held approximately 43.5% ($50.96 trillion) of their capital in corporate equities, directly and indirectly, compared with just 15.3% ($18.33 trillion) in cash and deposits, including money market funds. 

This resulted in a ratio of equity holdings to cash savings of 2.78​ times, second only to 3.4x in the 2000 tech bubble and 2.9x in 2021 (black line below, right axis, since 1900). As we saw in past recessions and bear markets (see grey bars below), when individuals want/need to raise cash, high equity-to-cash ratios magnify downside pressure on asset prices, particularly when starting from bubble valuations (like 1960, 2000, 2008, 2021 and now). Prices have taken years to recover from past liquidation events.

This brings us to serious questions: how much “long run” do we have financially, and how much capital risk are we comfortable holding with our savings? Individuals must answer honestly and with self-awareness, hopefully informed by real-life experience. The segment below is worth a listen.

Retired Treasury bond manager Robert Kessler has always been skeptical of Wall Street’s “stocks for the long term” mantra. He explains why he is completely out of stocks in his personal portfolio—and why you should consider doing the same. Here is a direct video link.

Happy May!! Happily, not all the news is crappy!

Toronto Western Hospital is just commissioning the world’s largest wastewater heating system. Yup, the hospital will be getting 90% of its heat from the sewer system beneath the streets of Toronto. If that sounds crappy, consider the hospital will get upgraded heating systems and save $700,000 per year in operating costs…The project uses next generation technology and the City of Toronto is so jazzed about the potential for wastewater heating they have created a searchable, online waste water map so you can find out if your project could use wastewater heat. Here is a direct video link.

This morning, the first quarter 2025 US GDP estimate disappointed with a -0.3% annualized contraction (vs. -0.2% annualized estimate). At the same time, US consumer confidence surveys show future expectations at a 14-year low (below via Bloomberg, see US consumer confidence slumps).All three expectation components — business conditions, employment prospects, and future income — deteriorated sharply.

We also learned that private US employers added 62,000 jobs in April, significantly below economists’ expectations of around 115,000, marking the smallest gain since July 2024. See US Firms Add 62,000 Jobs, Smallest Gain Since July in ADP Data.

Corporate executives have signalled concerns that the recent plunge in confidence will filter through into weaker demand while warning that consumers can expect higher prices because of tariffs.

The latest Conference Board report for April shows that median 1-year consumer inflation expectations rose to 6%—the highest since November 2022 (below via The Daily Shot). This is a tough spot for the US Fed, which has the dual, conflicting mandate of maintaining price stability and full employment. So far, they have chosen a tighter monetary stance against inflation risks over a deteriorating job market.

Risk assets are in revolt, unaccustomed to being left without a bailout from their own reckless excesses.

At the same time, amid cancelled and delayed shipments, China’s official manufacturing purchasing managers’ index contracted to 49 in April, the weakest level since December 2023. See China’s manufacturing activity shrinks as US tariffs take effect.

China’s National Bureau of Statistics noted that there were “no winners in trade wars” and pointed to pressure on manufacturing data in other large economies.

China Beige book offers a pulse on the world’s second-largest economy in the segment below. In a blinking contest between the US and Chinese presidents, China will likely have more pain tolerance.

Shehzad Qazi, China Beige Book COO, joins ‘Squawk Box’ to discuss the impact of tariffs on China’s economy, the impact on Chinese exports and manufacturing activity, what China’s pain tolerance is for tariffs, what the endgame is in the U.S.-China trade war, and more. Here is a direct video link.