It seems that investors have no shortage of things to worry about. The Institute for Supply Management manufacturing index fell to 50.6 in August, indicating that the manufacturing sector is just a hair’s breadth away from contracting.
In Europe, similar surveys show the manufacturing sector contracting in France and coming very close to contracting in Germany. The employment picture also looks downright awful. Nonfarm payrolls failed to budge in August; the private sector added a measly 17,000 jobs while the public sector shed and equal number. Bond yields hit record lows … again.
Still, it would appear that much of the anxiety is overdone. Europe and America may indeed be slipping back into recession, but we are talking about a marginal drift from mildly positive growth to mildly negative shrinkage. We’re not looking at another 2008-caliber swan dive in which we have a 5% fall in real GDP and a doubling of the unemployment rate.
Meanwhile, stock markets around the globe already appear to be pricing in the worst. Consider the following table:
Riding high on a resource boom, Chile’s market looks mildly overpriced and Peru’s market resembles America’s 1990s dot-com mania. At a P/E ratio of 40, Peruvian stocks are absurdly expensive. But look at the rest of the countries on the list.
Brazil and Mexico — two emerging Latin American regional powers– currently trade at very reasonable prices, as does Turkey. Spain and Portugal both trade at single-digit P/E ratios.
As a point of reference, the last time American stocks traded at anything near those levels was the early 1980s — after a decade of stagflation and two oil crises.
Italy trades for just 10 times earnings, and Israel and the United Kingdom at only slightly higher. In comparison, the United States seems almost expensive — and it is still well below its long-run average of 15.
We may be at the tail end of a run-of-the-mill stock market correction—one of several that occur over the course of a typical bull market — or we could be on the verge of another leg down of broader bear market. Only time will tell. But given the current attractive pricing and given the all-encompassing gloomy sentiment that pervades the market right now, I would recommend erring on the side of bullishness.
Remember, in the immortal words of Warren Buffett, fortunes are made by being fearful when others are greedy and greedy when others are fearful. Investors are terrified right now, and stocks are valued near multi-decade lows. It would seem to me that a little greed is in order.
Charles Lewis Sizemore, CFA is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.”