THE BOTTOM LINE: The bitcoin debate, stretched stock valuations and PGIM’s David Hunt

This week:

• Business Insider CEO Henry Blodget discusses the stock market’s ascent to yet another set of new highs, and drills down on high valuations. He cites investment manager John Hussman, who points out that the market is now the most expensive of all time, and predicts a 60% loss in the S&P 500 before the end of the current cycle. Blodget contrasts that view with the one expressed by billionaire investor Warren Buffett this week, who said valuations make sense right now, because of how low interest rates are.
• He then kicks the valuation discussion over to Business Insider executive editor Sara Silverstein, who argues that Hussman’s valuation case adjusts for the below average profit margin during the tech bubble which may not be fair. Blodget offers a rebuttal to that, highlighting a chart showing historically elevated levels in a measure of US market cap to GDP, and says that while this doesn’t signal an imminent downturn, one will come eventually. Silverstein responds by noting that being two years early in calling a market top makes you wrong. She stresses that timing is everything.
• Silverstein walks through the Fidelity Chart of the Week, which shows that stock market breadth is the lowest since the election, which could be a signal of weakness.
• Blodget and Silverstein check in on the debate raging around the red-hot bitcoin and cryptocurrency market. Blodget doubles down on prior comments that bitcoin is a perfect example of a speculative bubble, and lacks intrinsic value. Silverstein is a bit more enthusiastic about bitcoin’s prospects, and says that many of the arguments against it can be applied to other assets, even gold. She also stresses that a great deal of bitcoin pessimism stems from a lack of understanding.
• Business Insider deputy executive editor Matt Turner speaks to David Hunt, president and CEO of PGIM, about where he sees investment opportunities. He mentions the search for yield, and says that interest rates in Japan and Europe are looking good right now. Hunt also says the firm has been successful finding real returns from real assets. In terms of the US, he thinks its economy is gradually improving, and sees a trend shifting towards corporate reinvestment in growth.
• Hunt checks in on the so-called Trump trade, which he says lost its footing after an initial surge. He notes that the market was boosted in the first two quarters of the year by an improving economy, and says Trump trade “animal spirits” are coming back into the market. Hunt also addresses the risks surrounding the Fed’s ability to normalize its balance sheet, and says it’s crucial for the market to watch the pace at which it happens. Beyond that, he says that on a forward P/E basis, the S&P 500 is fairly priced given the current low-interest rate environment.
• Hunt says that Japan is at the top of PGIM’s list in terms of international opportunities. He notes that there are large institutional investors there looking to put money into high-yielding assets elsewhere in the world. He calls it a “search for yield 2.0,” which is something we haven’t seen in quite some time from the Japanese.
• Turner asks Hunt about the overall state of the money management industry, who highlights the huge focus on fees, how firms are indexing, and how many managers they should be working with. He notes the decline in management fees as passive investment grows, and says that firms who closely track benchmarks will suffer. Overall, he thinks that the competitive conditions are actually beneficial to investors. On an asset allocation basis, Hunt thinks that stocks and bonds have come into an equilibrium.

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