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“The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next.”

— Ursula K. Le Guin

Friday uncertain charts

David Kostin, the chief equity strategist at Goldman Sachs, recently raised his 12-month price target for the S&P 500 to 6,300, a substantial 9% gain from the already all-time highs.

He also thinks the S&P will return just 3% a year over the next 10 years — and just 1% in real (inflation-adjusted) terms. 

I think this neatly sums things up for investors: There are lots of reasons to hope things get even better in the short term — and lots of reasons to worry things will get significantly worse thereafter.

How else to explain stocks (an optimistic asset) and gold (a pessimistic asset) both having their best year in the last 25 years, while bonds (the discerning asset) have an increasingly poor one?

Some attribute this to a “Trump trade,” in which the market is sensibly pricing in higher inflation, higher deficits and higher corporate profits. 

(Moody’s economist Mark Zandi warns that we should add lower growth to that list, as well.)

Others think the market’s unusual moves are being driven by the unwinding of "recession insurance"; or because good economic data shows the Fed cut rates prematurely; or that rising “term premiums” are sinking bonds (and signaling danger). 

The truth might be somewhere in the middle: Bob Elliott notes that it’s “much more likely that growth and inflation are stronger than what is reflected in current bond yields than what is reflected in current stock prices.”

If so, growth and inflation might remain in a best-case-scenario Goldilocks zone with an economy that’s not too hot and not too cold.

But even that happy scenario might be more than priced in: David Einhorn warned in a shareholder letter this week that this is “the most expensive stock market that we have seen since the founding of Greenlight.”

Yikes.

From that starting point, Kostin’s forecast of 1% annualized real returns may turn out to be a good outcome over the next decade — keeping in mind that that’s an average return.

Know, however, that if Kostin is right, stocks won’t be up 3% every year for 10 years.

Instead, they’ll be taking investors on a terrifying roller coaster ride that tries its best to throw you out at the bottom.

Such is the uncertainty of markets — and life. 

Let’s check the charts.

Price of gold, explained:

For the fiscal year that ended Sept. 30, the federal deficit was $1.8 trillion — a form of de facto money printing that may be benefiting gold. The US government already added another $308 billion to the deficit in the current fiscal year (just three weeks old), bringing total federal debt to $35.8 trillion.

Hard money is having a moment:

Gold has seen record inflows, outperforming everything other than (perhaps ironically?) US equities.

Price of gold, unexplained:

Despite all the deficit spending, the 10-year breakeven rate (the difference in yield between Treasurys and TIPS), indicates that financial markets expect inflation over the next decade to average just 2.3%.

Price of gold, unexplained (con’t):

The rest of us are not much more concerned. A University of Michigan survey out this week showed that short-term inflation expectations are down to 2.7% and long-term expectations are steady at 3%. (Who’s buying all the gold then? Central banks, probably.)

Rising expectations:

Per this graphic from The Washington Post, US millennials have been the big economic winner in the post-pandemic economy, mostly thanks to housing: “They leveraged their 5- or 15% down payment into a claim on record appreciation of their home’s entire value.”

It might be hard to cash out, though:

With the exception of the pandemic nadir, US homes are selling at their slowest pace in 30 years.

Downsizing:

US houses are, however, getting more affordable — by getting smaller.

Time to worry?

This chart from Goldman Sachs takes some explaining (see the blurb above), but the TLDR is that the selloff in bonds is on the cusp of being something for the stock market to worry about.

Given deficit spending, the election, the price of gold and the general uncertainty of life, there will be plenty to worry about.

Or you could just opt out — the thing about the investing roller coaster is that it’s a funny kind of one where you’re welcome to get off at the top.

(If you can spot it.)

Have a great weekend, high-return readers.

— Byron Gilliam

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