(Duration: 3:30 minutes)
It’s been [over ] 1300 days since we’ve seen a correction of 10% or more – Markets don’t die from old age, says Purpose Investments‘, Som Seif. At this point only a few things would interrupt the market’s momentum, explains Seif. “A 10% or more correction would be very healthy for the market.”
Transcript:
PIERRE DAILLIE: It’s been nearly [sic: over] 1300 days since we’ve had a correction of 10% or more. How much longer can that go on for, and are we due for a correction? At least a lot people think we’re due for a correction, but whether or not it comes is anyone’s guess, right now. (note: the latest earnings reporting season was volatile, but alas, no correction)
Has your outlook for U.S. Equities changed since January?
SOM SEIF: Unfortunately, it hasn’t. Look, as we all know, Bull Markets don’t die from old age, they die because of policy change, or from some form of shock, for example, a change of policy, or a screw-up from the Fed or central bankers around the world. [Without that] we’re likely going to see the momentum that we see right now continue for some time.
No question, rational people talk about the things I just said. There’s a disconnect between what you see happening to share prices, and what’s happening at the economic level, and the business level. You sort of say, “this doesn’t make sense.” But it actually does, and all it is, is this:
PE ratios go up because interest rates are low. Because companies buy back stock by issuing debt.
It’s just a structural thing.
And so, this is what’s been going on for the last year and a half, and it will continue to go on for some time until companies can no longer make that trade, i.e. when the cost of capital for buying back stock versus issuing debt is no longer logical.
What that balance issue will be for equity investors, will be that PE ratios will go down at some point, when interest rates go up. So the problem will be whether or not earnings will appreciate when interest rates go up as well. So price to earnings ratio can go down, but prices don’t necessarily go down.
They will only go down if earnings can’t keep up with interest rate increases.
So these are the issues, but right now, do I think that we’re going to see a correction of 10% or more in the next ninety days, so 1390 days? I don’t know.
Ten percent corrections, will, look, those are very healthy things for the market; it doesn’t mean we’re going to go down, 20% or 30%, which is what the big fear is, but I do think a 10% correction would be a healthy thing for the market. I just don’t know if its going to happen anytime soon.
We are seeing a lot more volatility in equity market today, I’d say, just because of uncertainty, because there are really more people on both sides of this trade.
Ultimately, there’s a lot of capital entering the markets and that really what’s driving all this.