Guru watch

David Rosenberg, founder, Rosenberg Research & Associates

Around “80% of the stockmarket rally these past three years has been multiple expansion”, says David Rosenberg, founder of Rosenberg Research & Associates. Historically, about 70% of market growth has been due to earnings, and 30% to expanding multiples (put simply, investors being willing to pay more for each given dollar of future earnings).

But now the ratio has flipped. Why? Blame the largesse of the US central bank. The Federal Reserve (chair Jerome Powell, pictured) has cut interest rates each and every year since 2019, and during the pandemic, it printed more than $4.6trn. So investors have enjoyed “three years of Fed feast”. But that’s over now. “What happens to the market multiple when the famine starts?”

Optimists point to the fact that there are no obvious signs of recession. But it could still be ”a rough year” for investors. After all, “we didn’t have recessions in 1987, 1994, 1998, 2002, 2007, 2014, 2016 and 2018, and all of them proved to be very challenging years for passive investors who were all in”.

As for the idea that inflation is good for stocks because it boosts revenues, the reality is that “real assets” such as commodities tend to beat financial assets at such times. Indeed, the bad news for stockmarkets is that data from the past four decades shows an inverse correlation between inflation and market multiples. In other words, equity investors become less keen to pay up for stocks as inflation rises. “Stick that factoid in your back pocket when this debate comes up.”